Berlin Cable

Nov 30, 2023

Germany’s “Plumbers of Power” Lack Far-Sightedness

Just before passing its halfway mark, the coalition government of Chancellor Olaf Scholz has been hitting the financial buffers. Sadly, a general fiscal rethink is unlikely.

German Chancellor Olaf Scholz speaks as he delivers a government declaration on the budget situation to the lower house of parliament Bundestag in Berlin, Germany, November 28, 2023.
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Germany, or at least its shaky coalition government, is on the brink, or so current headlines suggest after “Karlsruhe,” shorthand for the country’s powerful Constitutional Court (and the name of the south-western town where the court is located), has spoken and declared Germany’s current budget unlawful. The world has been scratching its head—half disbelievingly, half gleefully (particularly in the case of European countries hard-hit by the financial and eurozone crises of the 2010s and subjected to German lectures on financial rectitude). How could Europe’s biggest economy, and the third largest worldwide, could have gotten itself into such a mess.

The short answer is: Germany’s “debt brake,” or “Schuldenbremse.”

The provision that government has to restrict new borrowing to 0.35 percent of GDP, enshrined in the constitution under Chancellor Angela Merkel in 2009, brought down German government debt from 82.5 percent of GDP in 2010 to just below 60 percent by 2019. But it has also meant that Germany has shied away, during the “oh-so-good” Merkel years when money was very cheap indeed, from urgently needed public investments: in its dilapidated armed forces, the Bundeswehr, thus regularly missing the agreed NATO goal of spending 2 percent of GDP by a mile and undermining European security, but also in infrastructure, schools, digitalization, and much more besides.

The “debt brake” was suspended, as the constitution allows in cases of an “emergency” (“Notlage”), during the COVID-19 pandemic and the first year of Russia’s brutal war of aggression against Ukraine, when Germany’s huge dependence of Russian gas threatened to choke the economy and turn out the lights, or at least the heating, in parts of continent’s most prosperous country. It then came back into force in 2023.

But with an eye on the “debt brake’s” likely return, Scholz, first as Merkel’s finance minister, then as chancellor, pushed for the establishment of various extra-budgetary funds and financial vehicles: a €177 billion climate and transformation fund (KTF) to help Germany’s economy going green here, a €100 billion “Sondervermögen” (“special fund”) for the Bundeswehr there, and so on. According to the Financial Times, when the court ruling came, there existed some 29 such vehicles held off the government’s balance sheet, totaling €870 billion, at the national, and in some cases regional, level.

Remaining Cheerful

The Karlsruhe ruling has made such financial wizardry much more difficult: For example, the court has declared as unconstitutional the transfer of €60 billion in unspent debt intended to fight the effects of the pandemic to the KTF, and told the government it could not “hold over” debt taken on in year X to spend in year Y. Much of the “Scholz method” relied on exactly that.

The headlines have been brutal. For instance, news magazine DER SPIEGEL, taking aim at Scholz, ran a cover story titled “Downfall of a Know-it-All” (“Absturz eines Besserwissers”). In Olaf Scholz’ Chancellery, however, they have been trying to make light of the government’s current predicament. “As you know, we are currently looking for €60 billion,” joked Wolfgang Schmidt, head of the Chancellery and Scholz’ closest confident, when apologizing for arriving slightly late to an appearance at Chatham House's  Europe's Strategic Choices conference on Monday in Berlin. “Do you have any?” The audience did not.

And so far, the coalition, consisting of Scholz’ center-left Social Democrats (SPD), the Greens, and the pro-business Free Democrats (FDP), have not found a solution. In a first step, they have declared an “emergency” also for 2023, against much wailing among the “hawkish” FDP backbenches. Now the intra-coalition fight is on about the 2024 budget. Some in the SPD and Greens have signaled their wish the keep the “debt brake” suspended, but the FDP is adamantly opposed, and legal observers warn that the move to retrospectively declare a “Notlage” in 2023 only five weeks before the year is out may not pass muster in Karlsruhe either.

A Moment of Clarity

What the Constitutional Court has done is force the government into making choices it had so far sought to avoid, in part so that the coalition could work in the first place: the SPD got a higher minimum wage and some other welfare state improvements, the Greens highly bureaucratic measures to provide against “child poverty” and state subsidies to finance the green transformation, and the FDP the debt brake and a claim to uphold financial rectitude. For 2024, at least €17 billion are missing, according to Finance Minister Christian Lindner, who is also leader of the FDP. For the remaining two years of Scholz’ government, something will have to give.

In truth, however, the whole country is on the spot. Opposition leader, Friedrich Merz of the Christian Democrats (CDU), may attack Scholz as a “plumber of power” lacking what it takes to be German chancellor, but he and his party have no alternative concept either, other than insisting on upkeeping the “debt brake,” which some regional CDU leaders have started to question (Merz committed some “political plumbing” himself by openly attacking one of them, Berlin’s Mayor Kai Wegner, an unforced tactical error). In fact, under Merz’ leadership, the CDU and its Bavarian sister party, the CSU, supported half of the Scholz’ government’s legislative measures, so the alleged cowboy practices seem evenly shared across the political spectrum. The CDU/CSU also provided the necessary votes to anchor the armed forces “Sondervermögen” in the constitution, too.

Defense Expenditure Ringfenced

This is now an advantage. Expenditure for the German military, and for assisting Ukraine, is likely being ringfenced by the government. “As of now,” German Defense Minister Boris Pistorius told the Koerber Stiftung’s Berlin Foreign Policy Forum on Tuesday, possible cuts for 2024 and beyond would not affect his “area of responsibility.” And finding the needed “€20-25 billion” to beef up the regular defense budget once the special fund is empty, by 2027 or 2028, was certainly possible. However, the Foreign Office led by the Greens’ Annalena Baerbock who has already inter alia forced the hugely misguided closure of a number of Goethe Institute offices in France (of all places) may not be so lucky.

The bigger, and increasingly urgent, question is whether a country with international responsibilities as enormous as Germany’s can go on tying its hands financially at a time when European and world affairs are threatening to take a disastrous turn. Already, the European Union has started to sniffle amid Germany’s supposed financial cold. To deploy an overused term, Germany’s Zeitenwende in foreign and security affairs will be incomplete without a fiscal one, i.e., without a reform of the “debt brake” that at least allows for the needed investments.

Economically, the current government debt of somewhere at the mid-to-upper end of 60-70 percent of GDP is very far from worrying. Still, public opinion for the “debt brake” is high—over 60 percent support it, according to recent polling—and the CDU/CSU leaders sees it as a possible vote winner come the next elections in 2025, while the FDP is clinging to it for dear political life (it is currently polling around 5 percent, the parliamentary threshold). In a way, the situation is somewhat similar to 1955, when then CDU Chancellor Konrad Adenauer pushed through West German rearmament against the wishes of an unwilling populace. Alerted to dismal polls of 75 percent opposed to setting up the Bundeswehr by his press secretary Felix von Eckardt, Adenauer reportedly responded by saying: “Yes, there’s a lot of work coming your way.” (“Da kommt ‘ne Menge Arbeit auf Sie zu.”).

Unfortunately, today’s German leaders on the left and the right currently lack such sang-froid and far-sightedness.

Henning Hoff is Executive Editor of INTERNATIONALE POLITIK QUARTERLY.

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