The Government of Germany has suffered and struggled for a month to resolve the budgetary mess triggered by a ruling by the Constitutional Court on a star protagonist in the politics of German public accounts: the debt brake (Schuldenbremse). This mechanism, introduced in 2009 in the Constitution, prohibits the Executive from borrowing more than 0.35% of its GDP each year, in order to limit new debt, and can only be suspended in the event of a demonstrated emergency. The debt brake has always been proudly defended in this country as a symbol of budgetary virtue, but now that Europe’s leading economy needs to invest massively to transform its productive apparatus, rehabilitate outdated infrastructure and spur growth, the cap public debt is beginning to be seen as a hindrance by some economists and politicians.
The matter came to public debate after the Constitutional Court’s blow to the coalition government of social democrats, environmentalists and liberals of Chancellor Olaf Scholz. In their ruling of November 15, the judges of the TC considered it unconstitutional that 60,000 million euros of debt authorized for 2021, contracted to alleviate the impact of the covid pandemic and that had not been used, had been reallocated to the fund for the climate and the transformation of 2022. The High Court argued that the Government had not sufficiently justified the emergency of the situation, the use of funds and the time lag, and that therefore it had violated the debt brake.
The constitutional limit on debt was suspended in 2020, 2021 and 2022 to face the economic consequences of the pandemic and the energy crisis derived from the Russian invasion of Ukraine, but it had been reinstated for 2023. As a consequence of the ruling of the TC, which has forced to stop financing of ongoing projects and postpone deliveries of funds to the 16 länder (the federated states that make up the country), the Executive decided to suspend it again in 2023 to balance the accounts for this year that ends and be able to unlock money.
But the liberals, fervent defenders of budgetary rigor and punished in the polls these months, insisted on returning to the debt brake in 2024 – suspending it again would have meant five consecutive years of suspension – and finally this week, to the displeasure of the greens and resignation of the social democrats, the ruling coalition agreed not to suspend for next year. The parliamentary process of the 2024 budget will take place in January.
“A clear priority has been given to not investing; This will probably slow down long-term economic development and jeopardize Germany’s competitiveness,” laments Marcel Fratzscher, president of the German Institute for Economic Research (DIW) in Berlin. In a recent meeting with foreign correspondents, Fratzscher argued that “the debt brake is obsolete and has become a serious threat to future opportunities and prosperity; “Not only should it have been suspended for 2024, but it should be reformed.”
The debt brake was introduced in 2009, because the relationship between public debt and GDP exceeded the 60% threshold set in the Maastricht treaty, a situation resulting from heavy public spending to revamp the economy of the former GDR (Germany reunified in 1990) and the loss of tax revenue during the great global recession of 2007-2009. It was enacted at the initiative of Christian Democratic Chancellor Angela Merkel’s grand coalition government of conservatives and social democrats.
Being a constitutional reform, it had to be approved by a two-thirds majority in the Bundestag (Lower House of Parliament), and at the federal level it limited the budget deficit to 0.35% of GDP as of 2016. This week, the Minister of Finance, the liberal Christian Lindner, defended that “the debt brake is a success story that saved the country from the chronic increase in debt; We must not abolish it or weaken it, but adhere to it.”
The debt brake, initially intended as a guarantee for budgetary rigor, is becoming a straitjacket that Germany has imposed on itself and that legally limits its possibilities of investing in the growth of its economy. “Germany, unlike other European countries, depends heavily on its industry and if it wants to maintain its advantage over its competitors, it will have to invest much more,” insists economist Marcel Fratzscher.
“Cut spending, reallocate or increase taxes; These were the options,” summarizes political scientist Andrea Römmele, vice president of the private Berlin university Hertie School. In a meeting with the foreign press, Römmele emphasized that “Germany must spend billions to promote the climate transition and the transformation of its industry, which suffers from high energy prices and endures American and Chinese competition.”
That’s why voices are emerging, spanning the political spectrum, calling for some kind of debt brake reform. This same week, those responsible for Finance of the land of Baden-Württemberg (the green Daniel Bayaz) and the city-state of Berlin (the Christian Democrat Stefan Evers) have proposed creating a commission with representatives of the federal government, the länder and economists experts to propose adjustments. “Including an investment clause would allow additional investments to be financed with loans, for example to face the challenges of transformation,” say Bayaz and Evers, who also propose that the debt authorized by emergency can be used beyond the year for which it was authorized.
