Exclusive: Germany considers 'shadow budget' to circumvent national debt rules - sources

BERLIN (Reuters) - Germany is considering setting up independent public agencies that could take on new debt to invest in the country’s flagging economy, without falling foul of strict national spending rules, three people familiar with talks about the plan told Reuters.

FILE PHOTO: The skyline with its financial district is photographed early evening in Frankfurt, Germany, October 8, 2018. REUTERS/Kai Pfaffenbach//File Photo

The creation of new investment agencies would let Germany take advantage of historically low borrowing costs to spend more on infrastructure and climate protection, over and above debt limits enshrined in the constitution, the sources said.

Germany’s debt brake allows a federal budget deficit of up to 0.35% of gross domestic product (GDP). That’s equivalent to about 12 billion euros ($13.3 billion) a year but once factors such as growth rates have been taken into account, Berlin only has the scope to increase new debt by 5 billion next year.

Europe’s largest economy is teetering on the brink of recession and pent-up demand for public investment from towns and cities across the country is estimated at 138 billion euros by state-owned development bank KfW.

Under the “shadow budget” plan being considered by government officials, new debt taken on by the public investment agencies would not be accounted for under the federal budget, said the sources, who declined to be named.

Limits on how much debt they could take on would instead be governed by the rules of the EU’s Stability and Growth Pact, giving Germany room to boost spending without needing a two-thirds majority in parliament to change its own debt rules.

“Norway has its oil, Germany has its credit standing. It’s like a national resource,” one senior official told Reuters, pointing to the fact that German debt is in such demand that yields have turned negative, even for long-term bonds.

“If managed wisely, an independent public investment agency could even make money by taking on new debt,” the official said.

Otto Fricke, chief budget lawmaker of the opposition business-friendly Free Democratic Party, told reporters on Monday it would not back any plans to introduce parallel budgets through independent public agencies.

“This is nothing but an attempt to led voters up the garden path,” Fricke said, adding that he was concerned parliamentary control over budget questions would be weakened.

Spokeswomen for the Finance Ministry and the Ministry of Economic Affairs and Energy declined to comment.

The Finance Ministry spokeswoman pointed to an earlier statement by a deputy finance minister for parliamentary affairs saying Berlin did not think there was a lack of public funds.


Under the European Union’s fiscal rules, countries can run a deficit of up to 1% of economic output as long as their debt-to-GDP ratio is significantly below 60% - something that Germany’s Finance Ministry expects to happen this year.

That would mean Germany could take on new debt worth up to 35 billion euros a year, rather than the 5 billion allowed under its own constitutionally enshrined debt brake.

The move comes at time German borrowing costs are at a historic low, with bond yields in negative territory. That means investors are willing to pay a premium to keep their money with Berlin, rather than getting interest payments.

Philipp Steinberg, head of the economic policy department at the Ministry for Economic Affairs and Energy, said it could take a while for a coalition to emerge in parliament in favor of changing the national debt rules, so the government should act.

“We should explore all possibilities to finance necessary investments under the debt brake, including setting up independent bodies not accounted for under the debt brake,” he said. “We should be able to resist criticism about using accounting tricks - the task is worth it.”

However, some cautioned that using “accounting tricks” to circumvent strict national rules could harm Germany’s economic credibility and that policymakers should balance the long-term risks with the short-term fiscal gains.

“Germans like their rules and they like to interpret them very narrowly,” said Tom Krebs, professor of macroeconomics and economic policy at the University of Mannheim. “I’d rather focus on changing the fiscal rule in our constitution.”


With the current fragmentation of Germany’s political landscape, it would be very difficult to reach the two-third majorities needed in both chambers of parliament to change the national debt brake, analysts say.

It would require an unprecedented “super-grand coalition” of Chancellor Angela Merkel’s conservative CDU/CSU bloc and Finance Minister Olaf Scholz’s center-left Social Democrats with at least two opposition parties such as the pro-spending Greens and the far-left Die Linke joining them.

Separately, Economy Minister Peter Altmaier on Monday floated the idea of creating a non-profit climate foundation into which Berlin could initially inject 5 billion euros.

The foundation would issue interest-free loans for climate protection projects - up to a maximum of 50 billion euros - with the aim of reducing German carbon emissions, he told reporters.

That’s roughly the amount needed to finance the additional climate protection measures the government is considering, and which Berlin aims to present on Sept. 20.

Altmaier said any government borrowing or lending through such a non-profit foundation would not violate the federal government’s self-imposed balanced budget goal - or the more formal debt brake - because the foundation would be private.

Reporting by Michael Nienaber; editing by Paul Carrel and David Clarke