As part of its obligations as a member of the European Currency Union, the Federal Republic of
Germany has to meet criteria on the state deficit (no more than 3% of gross domestic product) and the
total amount of national debt (no more than 60% of gross domestic product). Since in Germany the
Länder and the Federation are independent when drawing up their budgets (Art. 109 of the Basic Law),
agreement must be reached on expenditure policy in order to meet the Maastricht criteria. For this reason,
in 2002 the Financing Planing Council introduced section 51a into the Law on Budgetary Procedures,
laying the foundations for a so-called "national stability pact".
The key components of the arrangement are:
- Federal government and federal states make efforts to reduce net borrowing with the aim of
achieving budget balance; - The FPC's coordination function is given stronger legislative obligation and is made more specific
with regard to EU legal requirements. - The FPC assesses economic and fiscal factors and makes recommendations regarding budgetary
discipline. - In particular, it is in charge of recommending an expenditure rule designed to ensure
implementation of European requirements. - The members discuss compatibility of the budgetary development with the provisions of the SGP.
If required, the FPC gives recommendations for the restoration of budgetary discipline.
In particular the FPC agreed on a medium term expenditure line (from 2004 to 2006 no more than 1%
expenditure rise in annual average). The agreed expenditure line has clear advantages within the
monitoring process of the FPC. Bund and Länder can directly influence the expenditures side of the
budget by limiting and restructuring of expenditures and, if necessary, by implementing corrective
measures. Over the business cycle automatic stabilizers on the revenue sides can fully operate. However
one problem of expenditure rules could be that they are vulnerable to “creative accounting”. Although
such manipulations cannot be excluded in principal, they should not be of significant relevance in the
long term.
In sum, the experiences with expenditure rules in a federalist country like Germany are to a large extent
positive. The increase in expenditures could be kept limited; however, the deficit increase to be deplored
could not be prevented. Insofar the options of the finance ministers in that specific institutional setting
are exploited.
As the expenditure limits are not legally binding, they lay emphasis on peer pressure among equal
partners in a cooperative environment (political commitments). The decisions of the FPC on a commonly
recognised expenditure line are used as a guide for the budgets of the Federal government and federal
states (including local authorities).
In addition, the technical ability of the governments and the Financial Planning Council to monitor and
control the evolution of the budgets is of importance. In Germany the high standards of transparency of
the Public Budget system support this monitoring process. Therefore the FPC is able to strengthen the
process of budgetary discipline at federal and lower level.
Additional rules
Rules for States in fiscal stress
The Law on General Principles (Maßstäbegesetz) which is together with the basic constitution the main
reference for the fiscal equalization law exposes principal requirements to be fulfilled in order to receive
support by the collective of Bund and Länder while a general no-bail-out clause is not in line with the
German federalist system.