Setback for Merkel's Pet Project: German States Blackmail Berlin over Fiscal Pact
The fiscal pact, designed to impose budgetary discipline on the EU, is one of Chancellor Merkel's pet projects for fighting the euro crisis. But she needs the support of Germany's 16 states to get the treaty through parliament. The governors are selling that support at a high price.
Germany is under increasing international pressure to change its approach to fighting the European debt crisis. Now there is also growing domestic tension over one of the central pillars of Chancellor Angela Merkel's crisis management strategy -- the European fiscal pact.
The states are also strongly resisting pressure to swiftly consolidate their finances. According to their calculations, many of the state-level finance ministries will not be able to fulfill the provisions of the fiscal pact, which is expected to come into force in January 2013. The treaty requires that Germany limits its structural deficit to 0.5 percent of gross domestic product from 2014 onwards. The German government has already committed itself to reducing its budget deficit to 0.35 percent of GDP as early as 2014 to comply with the provisions of the German "debt brake," a 2009 constitutional amendment that was a model for the European fiscal pact. Under the debt brake rules, German states -- which are responsible for their own finances -- have to completely balance their budgets by 2020.
According to the roadmap toward balanced budgets, state and local governments will only be able to run a maximum deficit of 0.15 percent in 2014, corresponding to around 4 billion ($5 billion). That target would mean that North Rhine-Westphalia, Germany's most populous state, would only be able to incur new debts of around 900 million in 2014. In actual fact, the state's government plans to borrow 3.3 billion. The state of Hesse and the city-states of Berlin and Hamburg are also planning to borrow far greater sums than are foreseen under the debt-brake targets.
German parliament, the Bundestag, will vote on the fiscal pact on June 29. Because the fiscal pact involves transferring power to the European Union, the government needs a two-thirds majority in both the Bundestag and the Bundesrat to get it approved. That requirement gives the opposition parties in the Bundestag and the state governments considerable leverage over the government. The government is currently negotiating with the opposition parties and the states over the conditions for their support.
Twenty-five out of the EU's 27 member states signed up to the fiscal pact, a pet project of Chancellor Merkel, at an EU summit in January, with only Britain and the Czech Republic refusing to join. The pact aims to impose stricter fiscal discipline on member states through binding limits on budget deficits and quasi-automatic sanctions on countries that breach deficit and debt limits.
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