Germany grapples with its ‘debt brake’

By Sabine Kinkartz

BERLIN: The rules are clear: The German state must make ends meet with the money it takes in. That’s what is written in the constitution. It’s called the Schuldenbremse, or debt brake. Only in exceptional circumstances can the debt brake be lifted, and the government take on new debt.

From 2014 to 2019, the federal government was able to comply with these conditions as the budget was always balanced. But then came the coronavirus pandemic and Russia’s invasion of Ukraine. The Bundestag suspended the debt brake several times, and the government was able to borrow billions.

Finance Minister Christian Lindner’s goal was to put an end to this trend of suspending the debt brake and consolidate the budget. Now he feels compelled to suspend the debt brake retroactively for 2023 as well. Since the Federal Constitutional Court declared the financing of the Climate and Transformation Fund (KTF) to be unconstitutional, the government’s current budget planning has become inapplicable.

The 60 billion euros ($66 billion) that the coalition of the centre-left Social Democrats (SPD), Greens, and neoliberal Free Democrats (FDP) paid into this special fund after taking office in 2021 had been left over from the coronavirus pandemic and hadn’t been used.

The judges ruled that setting aside emergency loans for the future and spending them in ways not approved by the Bundestag isn’t permissible. The decision caught the coalition off guard, and now there has been widespread confusion about how to react to it. Especially since the KTF isn’t the only special fund. The German armed forces have a special fund of 100 billion euros, for example, though since this backed by the constitution, it is presumably unaffected.

The situation is different with the Economic Stabilisation Fund (WSF), a crisis fund of up to 200 billion euros primarily designed to finance energy price controls. It was set up in 2022, and a large part of the money was earmarked for 2023 and 2024.

As a precautionary measure, Finance Minister and FDP leader Lindner has now imposed a budget freeze. He has said that before further discussions on the 2024 budget, he wants to secure the electricity and gas price controls that have already been paid out with a supplementary budget.

But what happens then? The SPD, Greens, and FDP appear stumped.

One reason for this is that the three parties have fundamentally different positions. The coalition is made up of two more left-leaning parties and one neoliberal party. Since the very beginning of their collaboration, the FDP has insisted on balancing the budget and restoring the debt brake as quickly as possible. On the other hand, the SPD and Greens refuse to budge on their climate and social policy goals, which come at a high cost.

Do we now have to forego spending billions on the development of a carbon dioxide-neutral economy to protect the climate? The Greens wouldn’t accept this. On the other hand, the SPD would protest if massive cuts to social spending, unemployment benefits, or pensions were to come into play. The FDP, on the other hand, would oppose tax increases for the rich or a renewed suspension of the debt brake. The debt brake is a thorn in the side of many in the SPD and Greens. SPD leader Saskia Esken wants the debt brake to be eased, while Economy Minister Robert Habeck, of the Green Party, said recently at his party conference in Karlsruhe: “With the debt brake as it is, we have willingly tied our hands behind our backs and are now stepping into a boxing match.”

Now, in view of Germany’s miserable economic data, support is also coming from some economists: Can Germany keep up globally with such a rigid austerity policy?