By Michael Nienaber

BERLIN, (Reuters) – European governments will have to consider reining in their government borrowings and reimposing strict budget discipline sooner rather than later. Otherwise markets may start punishing highly indebted countries in the Euro zone, a high ranking German finance ministry official has said.

Florian Toncar spoke to ministry officials on Monday at a closed-door meeting. He said that Germany must ensure, at European level, that the Pandemic has ended, and the bloc returns back to a more conservative period in public finances.

Toncar stated that he is convinced Europe will not ask how much and what extent the rules are bent but how much it can borrow. Toncar spoke according to a video recorded by Reuters.

European leaders agreed to suspend fiscal rules for the bloc until 2023, but it is up for debate whether or not the Stability and Growth Pact needs to be amended to give more flexibility to the EU before the Pact kicks back in next year.

Three-party coalition government led by Chancellor Olaf Scholz so far has signalled openness to reforming EU rules. Toncar however, who is part of the conservative Free Democratic Party (FDP), made comments that indicate a shift in tone.

Toncar stated that Toncar believes that the paradigm shift in Germany is nearer than most people think. Toncar also said that Germany needs to focus on improving its economy rather than worrying about weakening fiscal rules.

Toncar, who is a close aide and secretary to Finance Minister Christian Lindner said that it won’t be possible for us to take on any debts in Europe.

Toncar couldn’t be reached immediately by the ministry and Toncar wasn’t available for comment.

Before the pandemic, Germany, together with some other predominantly northern countries, was an active member of the Euro zone calling for governments in the southern bloc with high levels of debt to curb spending and reduce borrowing.

YIELD FREADS

Recent years have seen unprecedented debt yields across Europe thanks to the European Central Bank’s bond-buying programme. It has reduced the spread of yields between countries with lower debt, such as Germany and Italy, which have a greater debt burden.

Although the borrowing costs for the Euro area have risen in recent months as the ECB tries to end its panic-inducing emergency bond buying stimuli, they are still historically low.

Germany’s benchmark 10 year Bund yield stands at minus0.06%. This means investors must pay the German government to keep the debt. In 2015 Bund yields were above 1%, whereas they were at 2.2% a decade earlier. Italian borrowing costs also remain low. The gap between German/Italian 10-year bonds yields is at 138 basis points (bps), higher than the 85bps low last year but lower than the 300 peak before the coronavirus epidemic.

Italy faces fresh doubts about its viability as the ECB announces plans to cut back on emergency support, which helped most euro-zone economies weather the coronavirus pandemic.

To protect people and their businesses against the effects of the coronavirus, European member countries, including Germany, have borrowed record amounts from investors.

To help the countries most affected by this pandemic such as Spain and Italy that have been hit the hardest by it, the EU created a new recovery fund, worth 750 Billion Euros ($860Billion). This was funded by Brussels.

Italy and France are among the states that have warned Europe against a return to austerity if budget deficits and total debt limits remain the same as under the Stability and Growth Pact. This is because more money will be needed for climate protection.

Toncar said that international market pressure could be beneficial as it may help accelerate structural reforms.

Toncar stated that Germany too has the possibility of discussing priorities and structures. Toncar also said that they will need to discuss again how best to make their country, or our communities, better.

It’s also possible to improve everything. This is not about saving money, it’s about improving and updating the public sector. Toncar stated that sometimes scarcity can also be a chance.

($1 = 0.8731 euros)