Is it Time for Germany to Reconsider Its Stringent Debt Regulations in Times of Crisis?

25 Oct, 2023

Is it Time for Germany to Reconsider Its Stringent Debt Regulations in Times of Crisis?

Germany is reevaluating its rigid spending limits, which were initially crafted in an era characterized by benign globalization, friendly coexistence, and affordable Russian gas. This reconsideration was voiced by Robert Habeck during the unveiling of an industrial strategy document.

Habeck emphasized the necessity of reviewing the rules established during a bygone era and assessing their suitability for the contemporary period. This pertains to Germany's constitutionally mandated "debt brake." This emblematic commitment to maintaining balanced budgets, enacted during the tenure of former Chancellor Angela Merkel's government in 2009, restricts Germany's new borrowing to 0.35 percent of its gross domestic product.

The debt brake was temporarily suspended for three years at the onset of the COVID-19 pandemic in 2020 to mitigate the economic impact of lockdowns. However, it is set to be reinstated in 2023, as stipulated in the 2021 coalition agreement among Chancellor Olaf Scholz's Social Democrats, Habeck's Greens, and the pro-business Free Democratic Party (FDP).

Habeck underscored that the coalition's agreement, which includes the debt brake, remains intact. Finance Minister Christian Lindner, among others, has been an advocate for adhering to Germany's fiscal orthodoxy.

The potential revision of Germany's fiscal regulations is slated for discussion "at the latest in the next legislative period," commencing after the upcoming general election in 2025, according to the strategy paper presented by Habeck. Recent events, including Moscow's invasion of Ukraine, disrupted the free flow of Russian gas to Germany, resulting in surging energy costs. This compelled Berlin to increase military spending in response to perceived new threats.

In navigating these crises while adhering to the debt brake for the 2023 budget, the government has resorted to creating special funds that operate independently of the official budget. One such fund amounts to €100 billion and is allocated for the modernization of Germany's armed forces. The other fund, totaling €200 billion, is designed to provide support to households and businesses grappling with the escalation in energy costs.