Germany's Fiscal Crisis Spurs Calls for Debt Brake Reform

29 Nov, 2023

Germany's Fiscal Crisis Spurs Calls for Debt Brake Reform

Germany's budget crisis is reshaping perspectives on self-imposed borrowing limits, even within opposition conservatives. The drive for essential investments overrides the previous emphasis on fiscal restraint. A recent constitutional court ruling against a budget maneuver challenging Germany's "debt brake" has disrupted Chancellor Olaf Scholz's coalition's financial plans. The court's decision implies a stricter adherence to the debt brake's spirit, limiting the structural budget deficit to 0.35% of GDP amidst rising spending needs.

This dilemma raises concerns among business and political leaders about Germany's ability to finance responses to critical challenges, from climate change to the Ukraine war. Chronic under-investment, spanning a decade, has contributed to the country's economic stagnation. Calls for debt brake reform are gaining momentum, even among conservatives impacted by the court ruling.

Reforming the debt brake requires constitutional changes, necessitating a two-thirds supermajority in parliament. Despite the urgency, Federal CDU leader Friedrich Merz advocates adherence to the brake, while a government spokesperson stated that reform is not currently on the agenda.

Germany introduced the debt brake in 2009 amid global and European financial crises. The pandemic prompted its suspension in 2020, allowing emergency financing. Recent crises have led to increased off-budget fund usage, coupled with rising debt costs due to interest rate hikes.

The court ruling against a budget maneuver on Nov.15 underscored the need for debt brake adherence, prompting the government's fourth consecutive-year suspension. ING Chief Economist Carsten Brzeski sees this as a clear sign that reform is essential.

Reform proponents, including the Greens and segments of Scholz's SPD, advocate for greater investments by amending the debt brake. Conservative politicians, fearing fiscal laxity, propose targeted solutions, such as exempting military investments from the brake.

The issue is expected to intensify for conservatives by the 2025 federal elections, as polls suggest their potential victory. Addressing Germany's fiscal challenges will be a critical task for the incoming government.