EU financial crisis: German budget could 'BREAK APART' Eurozone

May 8, 2018
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Germany’s spending plans, delivered this week, suggest that the austerity years are far from over after Mr Scholz surprised international onlookers by proposing a cut in investment, a reduction in defence spending, the freezing of funds for development aid and the lowering of Germany’s contribution to the next EU budget.

The budget will also be a disappointment to US President Donald Trump who has urged Germany to increase the percentage of GDP devoted to defence spending in the US-led NATO alliance. However, Germany has done the opposite, and all eyes will now be on the EU’s exemption from US steel and aluminium tariffs due to expire at the end of next month’s extension.

Presenting the budget plans Mr Scholz said: “I am convinced, in good economic times, a responsible fiscal policy must achieve both a reduction in debts and a rise in investments.”

Columnist Wolfgang Münchau, writing in the Financial Times, said the German budget is an event that could “greatly increase the likelihood” that the Eurozone will “break apart”.

Mr Münchau claims that the new finance minister is looking to push the budget into a surplus of one percent of GDP or higher, and that “such a surplus would, over time, eradicate all public debt,” a move he says is “as un-European as Greece’s excessive fiscal deficits.”

He writes: “At that point Germany will have reached ordo-liberal utopia: it will have become like Nicolae Ceausescu’s Romania, which boasted a surplus of $9bn in 1989, just before the dictator was overthrown.”

Mr Münchau adds that “this budget will exacerbate the Eurozone’s already significant imbalances.”

One such “significant imbalance” concerns the fear amongst German conservatives that the natural end-game for Eurozone reform involves the pooling of all Eurozone national debt, with Berlin picking up the tab for poorer and most irresponsible member states.

In an effort to address the fear of hasty Eurozone reform, Germany’s most senior conservative politicians will meet today to pass a resolution rejecting any pooling of Eurozone debts in Europe.

However Mr Scholz’s one percent budget surplus plan suggests that Germany is looking to end any such argument over ‘debt pooling’ by eradicating all its public debt before such plans are finalised.

With no debt to pool, and no reason to consider the proposals, Germany would be free to discuss other aspects of Eurozone reform, free of the single most controversial point for German voters.

On the budget surplus, Mr Münchau writes in the FT: “There is only one rational explanation for such a policy. Getting rid of your own debt is a way to end the debate about risk sharing in the eurozone.

“But copying Ceausescu’s economic strategy is a rather extreme way to go about this.”



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