The unclear future of Germany’s ‘debt brake’

Though the SPD had supported its introduction in 2009, many party members criticized the debt brake since then for limiting the governments’ leeway for economic stimulus. Recently elected SPD-co-leader Norbert Walter-Borjans called it an “investment brake”. That put Germany's Finance minister Olaf Scholz in an uncomfortable position. [EPA-EFE/HAYOUNG JEON]

According to media reports, finance minister Olaf Scholz (SPD) has tried to break German frugality rules and take on more debt. This earned him harsh criticism from the co-governing CDU/CSU Union and parts of the opposition and the ministry now denies any plans to change the debt brake.

The “debt brake” has long been a pillar of German fiscal policy but recently, it looked shaky.

According to media reports, Finance Minister and vice-chancellor Olaf Scholz (SPD) had his team investigate ways to circumvent it and allow Germany to take on more debt. However, during an interview on Sunday, Scholz insisted that he sees no need to change the policy.

Such mixed messages might raise eyebrows in Brussels, where German frugality had been criticised last year.

The German debt brake was enshrined into the constitution in 2009 by the same parties who govern today: social-democrats and the conservatives of the CDU and its Bavarian sister party CSU.

In the wake of the financial crisis, billions of tax money were pumped into the struggling economy. As a signal to voters that this was a one-off measure, the government limited its own ability to take on future debt by capping the structural deficit at 0.35% of GDP. That is the debt brake, in force since 2016.

Though the SPD had supported its introduction in 2009, many party members have criticised the debt brake since then for limiting the governments’ leeway for economic stimulus. Recently elected SPD-co-leader Norbert Walter-Borjans called it an “investment brake”.

Money for Communities and the Climate

That put Scholz in an uncomfortable position. The debt brake had been re-affirmed in the coalition pact which was binding for him, as vice-chancellor and finance minister. Publicly, he had repeatedly defended German frugality and debt-averseness despite signs of slowing growth and additional costs for measures against climate change.

However, last week German media reported that the finance ministry was looking for ways to circumvent the rule. In particular, the draft aimed at relieving German communities and cities by shifting their debt onto the federal level.

This alone would mean an additional 22 to 23 billion euro of additional debt, more than double of what the debt brake would allow. And in the long run, more debt might be necessary to enact climate protection measures, according to economists such as Peter Bofinger, a former member of the German Council of Economic Experts.

Plan set for March

To avoid having to change the Constitution, the ministry reportedly looked into a model where new debt would not be taken on by the state as such but by public companies, or would involve funds which do not fall under the debt brake.

Other media reported that Scholz planned to simply suspend the debt brake temporarily to help communities.

Under the plan, 1% of GDP could be taken on as debt, around €35 billion, but only as long as overall debt was below 60% (reminiscent of the Maastricht criteria). The plan was set for presentation in March. As sources, the media reports had cited “information” from the ministries.

“You cannot suspend basic rights”

The reaction of the SPD’s coalition partner, the CDU/CSU, was swift and fierce. “You cannot suspend the debt brake at your whim, just as you cannot suspend basic rights,” said Eckhardt Rehberg, budgetary speaker of the CDU/CSU. The liberal FDP also criticised Scholz’s plan.

Support came from SPD’s leader Norbert Walter-Borjans as well as from leftist Die Linke. The German Greens still haven’t commented on Scholz’s plan. Only Winfried Kretschmann, Green minister-president of the state Baden-Württemberg (south-west), came out in favour of the debt brake.

In September last year, Green co-leader Robert Habeck said he wanted to keep it, albeit by introducing a reform that would allow for up to €35 billion investment.

On Monday, ministerial spokesperson Katja Novak stated that Scholz is a “great supporter” of the debt brake and that even with this policy Germany had enough financial leeway even in times of crisis. There is “no need to change it”, she said.

Europeans demand German investments

On Wednesday, Scholz will hold a teleconference with his European colleagues to discuss the financial effects of COVID-19 and how to counteract them. Brussels will listen to him with great care since the Commission has long been critical of German frugality.

The ECB and the European Commission have asked for German investments to increase the stability of the entire European economy.

In principle, the debt brake foresees a suspension in case of natural disaster or economic crises. So far, Scholz does not seem to perceive the coronavirus as disastrous enough to count.

[Edited by Zoran Radosavljevic]

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