The German government is struggling to find a way out of a billion euro budget crisis that risks stifling its vision for environmental and industrial transformation and plunging the country into years of economic stagnation.
More immediately, the consequences of a ruling by the country’s highest court – which stunned economists and policy-makers by deeming that the government’s 2024 budget broke fiscal rules enshrined in the constitution – risks toppling the already embattled two year coalition under Olaf Scholz.
On its cover, the news magazine Der Spiegel accused Scholz, whose popularity ratings have plunged, of being a “know-it-all” who was in the process of “leading the country into financial chaos”.
At the heart of the government’s quandary is the constitutional court’s decision to prevent its plans to divert €60bn of borrowing leftover from its pandemic emergency fund into a climate and transformation fund (KTF), to fuel Germany’s green revolution and modernise its industry.
The debt brake rule enshrined into its constitution in 2009 to bring stability and strengthen confidence in public finances during the global financial crisis was hailed as a victory for economic prudence at the time, rarely practised elsewhere. Now economists and policy-makers are referring to it as a veritable straitjacket, which Germany has managed to put on itself.
Leading economists say the consequences of the court ruling will stretch far beyond Europe’s largest economy. With talks on a 2024 budget indefinitely deferred, future financial support for Ukraine, the EU budget and other key areas of spending are all up in the air.
In the Bundestag on Friday, MPs scrambled to achieve a short-term solution to the crisis in an attempt to plug the €60bn shortfall, in the form of a supplementary budget for the current year. The German finance minister, Christian Lindner, said “intensive conversations” had been taking place in an attempt to salvage the three-way coalition’s goals – from decarbonisation to prosperity for all - but warned that “none of this will be comfortable”.
He has said he will pronounce 2023 to be a “year of emergency”, freeing him up at least to suspend Germany’s debt rule, for the fourth year in a row.
The problem might seem technical and deeply convoluted to the average German, but the sense of collective panic and shock has left many, already hit by the effects of inflation and still reeling from the aftermath of the pandemic, asking, as the tabloid Bild did on behalf of its readers: “what will this mean for me?” The fear of austerity measures and the loss of German prosperity is rife.
Calls in particular from Scholz’s SPD, and one of its coalition partners, the Greens, for a reform to the debt brake – which limits the government’s structural deficit to 0.35% of GDP – are getting ever louder. But Lindner, from the third coalition partner, the pro-business FDP, so fiscally hawkish he is nicknamed the Sparfuchs – the saving fox, or skimper – is strongly against doing so. So too are the opposition Christian Democrats, who brought the rule in in the first place when they were in coalition with the SPD.
Its leader, Friedrich Merz, waiting in the wings to be a future chancellor if the government collapses over the crisis, chided Scholz for his “dogmatism” during an emergency parliamentary debate on Tuesday, comparing him to a “plumber” trying to plug the holes.
But he was scant on detail as to how he hopes to extract Germany from its predicament.
Some accuse the FDP and CDU of a fetish-like attachment to maintaining balanced budgets, the so called Schwarze Null or “black zero”, which were commonplace during the 16-year rule of Angela Merkel. Citing the example of the “Swabian housewife”, who never spends more than she has, it was a practice Merkel tried but largely failed, to impose on Germany’s other eurozone partners, much to widespread disapproval.
Despite calls for the debt brake to be reformed, a poll by Spiegel showed that two-thirds of Germans are also in favour of it and will take some convincing that it needs to be meddled with.
In effect, the entire credibility of the government is in question, not least because legal experts had warned in advance that its creative accounting move to shift the pandemic-related funds into the transformation fund was likely to fail to stand up to legal scrutiny.
Weighing in this week, former finance minister Peer Steinbrück, one of the authors of the debt brake, argued it was still needed in some form, but that “the existing one is obviously not fit for purpose”. He added: “We have an acute need for investment in a diverse range of fields, and are living in a different era to that of 2009.”
Marcel Fratzscher, the president of the German Institute for Economic Research, warned that German economic stability was at stake.
“Germany is in danger of getting left behind,” he told the Foreign Press Association, VAP. “My concern is that the government has no clear course internally as to how to deal with this. There are those that say investment should have top priority and those who say we should put the brake on spending. But these are diametrically opposed ideas and if we slow down with our ecological and digital transformation this would be a huge mistake for the future.”
