Lennard Welslau

Muss Deutschland jetzt viel mehr in den EU-Haushalt zahlen und ist Deutschland gar der Angeschmierte beim Vorschlag der EU-Kommission zum neuen Mehrjährigen Finanzrahmen? Die Antwort darauf ist kompliziert - aber schlecht kommt Deutschland sicher nicht weg.

Warum? Stay with me:

Because it fears a change of the EU fiscal rules, the Commission is resorting to a very far-reaching interpretation of the rules to make room for much more defense spending. This is a shortsighted mistake because it risks accidentally killing the rules altogether at the worst moment.

Here is why:

Can Germany afford to take most defence spending out of its debt brake? Higher German defence spending would be fiscally sustainable, but would require cuts elsewhere and would breach EU fiscal rules

I published a short note on the implications of a proposed constitutional amendment in Germany, which includes an 11% of GDP fund for infrastructure and permission to fund most military spending outside the debt brake’s maximum deficit of 0.35% of GDP (Thread, 1/9): www.bruegel.org/analysis/can...

European Council conclusions on European defence, 6 March 2025 On 6 March, the European Council adopted conclusions on European defence.

Good outcome at the #EuCo on EU fiscal rules: National escape clause is branded as „immediate measure“ but the Commission is asked to explore further options (read: opening the rules). The insight seems to have kicked in that a prolonged use of the escape clause is probably not a good idea.

The paper makes many great points that go beyond this quick comparison of gross deficits. All code for replication of the above exercise is available on my GitHub github.com/lennardwelsl... 5/5

EU rules are forward looking, requiring more adjustment in their initial application. I estimate EU SPB targets below zero by 2035, while they remain close to 0.9% under the debt brake. Over 11 years (7+4 year adjustment), the difference could average 0.8 pp and total more than 450 bn EUR. 4/5

The debt brake's structural deficit cap, would imply SPBs between 0.75% and 0.9% of GDP (without gradual adjustment). For a 4-year adjustment, the avg. permitted annual structural deficit would be 0.47 pp (21 bn EUR) lower than under EU rules. For a 7-year adjustment 0.7 pp (34 bn EUR) lower. 3/5

Based on latest EU Commission and financial market projections, I find that Germany could face a binding debt safeguard and a 2028 target for its structural primary balance (SPB) around 0.75% of GDP. With a 3-year extension the target would be only 0.56%. 2/5

Do EU fiscal rules prevent a reform of the German constitutional debt brake? In a new paper @nilsredeker.bsky.social and @lucasguttenberg.bsky.social show that EU rules should leave more fiscal space. I calculated how much more and find that the difference is substantial. Short thread 1/5

David Pinkus Welcome I am an Affiliate Fellow at the economic policy think tank Bruegel. My academic research focuses on questions at the intersection of Public Economics and Financial Economics. In my PhD thesis...

David Pinkus at Bruegel, he’s not on here unfortunately www.david-pinkus.com

Consumption-based diff. btw inflation faced by low- and high-income HHs reduced over recent months due to disinflation in energy and food prices. I built a data app presenting joint work with Bruegel colleagues: inflation-inequality.onrender.com (feedback welcome, original article: t.co/mi5hbR8dqU)

A quantitative evaluation of the European Commission’s fiscal governance proposal This paper focuses on the fiscal adjustment that the first regulation would require of countries with debt above the treaty benchmarks.

For a detailed look at the methodology, see Annex 2 of our original working paper
www.bruegel.org/working-pape...

GitHub - lennardwelslau/eu-debt-sustainability-analysis: Python code for reproduction of results of ... Python code for reproduction of results of Bruegel working paper "A Quantitative Evaluation of the European Commission´s Fiscal Governance Proposal" by Zsolt Darvas, Lennard Welslau, and .....

Code, public data, and a short tutorial for replication of our simulations are available on my GitHub github.com/lennardwelsl...

4) The Council’s proposal weakens the role of national independent fiscal institutions (IFIs) by stating governments "may request" an assessment, as opposed to mandating it like the Commission’s proposal did.

3) Council-endorsed climate-investments should have been excluded from the safeguards (while remaining in the DSA). Instead, only 2025-26 RRP projects are excluded. This puts investments that are instrumental to the green transition at risk without improving debt sustainability.

2) The compromise on the excessive deficit procedure (EDP) doesn't go far enough: Min. adjustment steps of 0.5% of GDP exclude interest payments only until 2027. Measuring the adjustment in primary instead of in structural primary terms makes little sense (t.co/HirR2TkUcK).

The Bad (4 points):

1) The new "deficit resilience safeguard" requires continues fiscal adjustment until a structural deficits are below 1.5%. The minimum adjustment steps (0.25-0.4% of GDP p.a.) micromanage the adjustment process and for countries like Italy the 1.5% margin may proof too tough.

5) Requiring efforts beyond the current Recovery and Resilience Programme (RRP) to extend the adjustment period from 4 to 7 years will incentivize additional reforms and investments.

6) The independent European Fiscal Board has a meaningful role in monitoring the implementation of the new rules.

3) Requiring the DSA to be Council approved, published, and replicable will increase collective ownership.

4) The reformulation of the "debt safeguard" now prescribes debt reduction only after deficits have been brought below 3%, which is not ideal but more reasonable.

2) Preserving the net expenditure path as main target (ie ignoring interest payments and cyclical items) as well as general and national escape clauses will make the system less procyclical.

The Good (6 points):

1) Retaining country-specific fiscal adjustment based on the debt sustainability analysis (DSA) makes successful implementation more likely.

Our assessment of yesterday's Council compromise on on the reform of the EU fiscal rules: A reasonable outcome overall, in some respects better, in others worse than the Commission’s April proposal: