Berlin Cable

Feb 01, 2024

On the Wrong Track

The German government has straightjacketed itself by a return to the “debt brake,” pursuing a stringent fiscal policy at a time when the country is trying to fight its way of out a recession. Two of three ruling parties think the approach is wrongheaded.

German Finance Minister Christian Lindner attends the 2024 budget debate session of the German lower house of parliament, the Bundestag, in Berlin, Germany, January 31, 2024.
All rights reserved

“This coalition government has ambitions,” Finance Minister Christian Linder, the leader of the pro-business Free Democrats (FDP), told Germany’s parliament during the budget debate this week. “This is an ambitious budget, not an austerity one.”

Somehow, however, it feels very different. 

Because of a ruling by the constitutional court last year that sharply curtailed the use of special, extra-budgetary funds, Chancellor Olaf Scholz’ government of Social Democrats (SPD), Greens, and the FDP had to revise its spending plans for this year and next in an painful process. Since the FDP continued to insist that the “debt brake”—a constitutional requirement introduced in 2009 under Chancellor Angela Merkel that limits new debt to 0.35 percent of GDP, but one that can be circumvented by simple majority by declaring an “emergency”—would apply again in 2024, the parties had to make do without €60 billion from a climate and transformation fund as well as cutting €17 billion from the regular budget. (The debt brake had been suspended since the start of the COVID-19 pandemic.)

This may not be “austerity”—which, absurdly, the Christian Democrats (CDU/CSU) are loudly demanding, claiming that “Germany lives beyond its means”—but it certainly doesn’t feel “ambitious” either. What’s more, two of the three parties in the ruling coalition clearly think the government is making a serious mistake. And they are right.

A False Policy

Germany’s economy is clearly struggling. After stagnating in the second and third quarter of 2023, it shrank by -0.3 percent in the fourth, the German statistics office Destatis reported on January 30. For the whole of 2023, Germany suffered a recession of -0.3 percent, the statisticians calculate. In short: Germany is flatlining and no longer on its post-pandemic recovery path, in stark contrast to other countries, such as the United States. 

At the same time, Germany’s public debt-to-GDP ratio currently stands at around 64 percent—and has been falling continuously since the beginning of 2022. In international comparison, Germany’s finances couldn’t be healthier. The United States’ debt-to-GDP ratio is more than double Germany’s, and Japan’s almost five times as much.

To pull the “debt brake” it such a situation makes no economic sense, by most accounts. Rather, it is likely aggravating an already grim economic situation, which is also politically risky domestically in view of the far-right Alternative für Deutschland’s (AfD) continued strong showing in national polling. Ask people in Scholz’ chancellery or the economy and climate ministry run by Vice Chancellor Robert Habeck (Greens), and they readily agree that Berlin is pursuing a wrongheaded policy against their better judgement. 

But since the FDP, which considers “fiscal rectitude” (or rather, the peculiar German understanding of it) as its last remaining “core brand issue,” Lindner insisted on applying the “debt brake” again and not, as would have been possible, to suspend it again with a simple parliamentary majority. And there was nothing the SPD and the Greens could do. After all, the return to the “debt brake” is included in the coalition agreement. Together with the commitment not to raise taxes it was the price the FDP demanded in 2021 for entering into the coalition in the first place. And after having lost a string of regional elections and with its national polling numbers hovering near the 5-percent “hurdle” a party needs to pass to enter the Bundestag, the FDP was not for turning.

Now it feels like the air has been sucked out of the “traffic light” coalition’s once laudable optimism—not a good omen for Scholz, whose image as a “political pro” has suffered over the whole budget affair, with once solid approval ratings nosediving. Last week he was asked by DIE ZEIT newspaper whether he had “thought of chucking it” and whether he was still “the right person for the job” (Answers: no and yes).

Inflicting “Serious Damage”

“The revised budget is a political choice and mainly stands out for not doing what is necessary, i.e., investing in decarbonization and stabilizing the economy,” says Philippa Sigl-Glöckner, an economist who runs Dezernat Zukunft, a macroeconomic think tank, and who used to work for Scholz when he was finance minister in the previous coalition government between the SPD and the CDU/CDU, under Angela Merkel. “From 2025, the funding gap will be a lot larger. Sticking to the debt brake—without serious reforms—has the potential to inflict serious damage to our economy.”

More and more German economists agree. While polls still show that the “debt brake” remains popular with voters, a growing number of economic experts are demanding at least a reform of the “debt brake” to gain more flexibility. The government’s Council of Economic Advisors this week called the constitutional requirement “too rigid” and suggested ways to give the government more wriggle room for investments. While the old “ordoliberal” school, which holds that the state’s main function is to provide the legal framework for fair competition rather than turn interventionist, still has many backers in Germany (certainly within the FDP), but the economic consensus is certainly shifting.

Constitutional changes, however, require a two-thirds majority. That would mean the CDU/CSU coming on board. And in contrast to all its public protestation to the contrary, Germany’s center-right is well aware the “No debt, please. We are Germans” dogma born during the early days of the euro crisis no longer suits the times. In fact, during the dying months of Merkel’s long reign, her head of the chancellery, Helge Braun, tested the waters by writing an op-ed for Germany’s Handelsblatt economic newspaper advocating a long-term post-pandemic suspension of the “debt brake” and constitutional change. 

But then and now, there are tactical reasons for the Christian Democrats to pretend that no changes are needed. In 2021, before the general election, Braun’s suggestion seemed a step too far into a post-Merkel era. Now, CDU leader Friedrich Merz sees electoral gain in not budging. Once the next election in 2025 is won, or so the calculation runs, the CDU/CSU, back in the chancellery, can try to get the SPD and Greens on board. In other words: The “debt brake” is bad for the country, but—for now—good for the CDU/CSU.

No Back to Normal

This only shows that the whole debate is hopelessly parochial. Germany may be the world’s third largest economy, but it thinks and debates its fiscal policy as if it were a small isolated island state rather than at the center of a continent that is feeling the knock-on effects in very direct and concrete ways. The CDU/CSU in particular seems content to simply close its eyes, for now; it still has to explain, for instance, which cuts it is proposing in order to finance the necessary budget shifts to permanently reach NATO’s 2-percent security spending goal. And greater investments are urgently needed beyond the military, too: from the green transition to infrastructure to digitalizing the country’s antiquated administration.

It also speaks of the vain hope, prevalent in Germany, that world affairs will return “back to normal” once Russia’s President Vladimir Putin comes to his senses and stops his war against Ukraine and the United States returns to its accustomed post-war role as a benign hegemon looking after Europe’s security. None of this is likely to happen and requires fundamental changes also to Germany’s fiscal policy. 

“We are, as [former SPD Chancellor] Helmut Schmidt said, only a middle power,” Scholz told DIE ZEIT in reply to a question about Germany’s role in supporting Ukraine. That may be so, but why then also run a purposefully self-limiting, if not debilitating fiscal policy? Schmidt would have known better—public debt grew considerably during his chancellorship. Today’s political leaders, including those in opposition, should know it, too. It is time that Germany starts punching its weight rather than risking its economy.

Henning Hoff is Executive Editor of INTERNATIONALE POLITIK QUARTERLY.

Read more by the author

Henning Hoff

A Revolution in German Security Policy

Vladimir Putin and his illegal war of aggression against Ukraine have achieved something no German politician has been able to: Setting the country on the path to becoming a serious military power.