FRANKFURT (AFP) – A row over Germany’s “debt brake” helped deal the death blow to Chancellor Olaf Scholz’s three-party ruling coalition, paving the way for next week’s snap elections.
The rule, which strictly limits government borrowing, now finds itself at the centre of debate over Europe’s ailing top economy, a key election battleground.
Critics blame it for years of chronic underinvestment that has caused infrastructure to deteriorate, kept defence spending low and hit education standards. Its defenders insist it has helped keep the country’s finances stable.
The constitutionally enshrined measure prevents the central government from running a deficit of more than 0.35 per cent of annual gross domestic product (GDP), except in emergencies.
It was introduced in 2009 by the government of then-chancellor Angela Merkel, at a time of debate about national debt levels during the global financial crisis.
More than two-thirds of the Upper and Lower Houses of Parliament voted for the rule, as it required a change to the constitution. It came into force for the federal government in 2016.
It was suspended for four years to permit extra spending during the coronavirus pandemic and then the energy crisis triggered by the conflict in Ukraine, but it came back into force in 2024.
They say it has helped keep spending levels under control in Europe’s top economy – Germany’s public debt is around 60 per cent of GDP compared to around 100 per cent or more for most other G7 countries.
One of its key political backers is the pro-business Free Democratic Party, part of Scholz’s coalition. It argues that the brake ensures that future generations are not burdened with the debts taken on by their forebears.
“Every euro of debt taken on today will have to be repaid by future generations,” the party said.
But the refusal of party leader Christian Lindner to countenance any easing of the rule when he was finance minister under Scholz left him at loggerheads with his coalition partners, and contributed to the government’s implosion.
Critics blame the brake for preventing investment in areas such as defence, as United States (US) President Donald Trump pressures Europe to boost funding, and for infrastructure problems, from late trains to patchy internet.
Other challenges, such as decarbonising the economy, also need vast public outlays.
Meeting them will require an additional EUR782 billion (USD811 billion) of government spending between now and 2030, according to the Dezernat Zukunft think tank.
“It is almost certain (that the country) will take on more debt in the future for public infrastructure and defence,” said chief economist with France’s Societe Generale bank Klaus Baader.
The government created off-budget funds for spending in certain areas such as defence and climate, drawing accusations they had engaged in accounting trickery to circumvent the rules.
The constitutional court ruled in November that the government had indeed broken the debt rules, specifically over a manoeuvre where they transferred money from a coronavirus support fund into climate change investments.
The ruling blew a hole in the coalition’s budget, ratcheting up tensions over the brake.
Leader of the centre-right opposition and favourite to be the next chancellor, Friedrich Merz, has sent mixed signals about the brake.
His CDU party’s position is that it should remain but he has occasionally indicated an openness to reforming it in certain circumstances.
In a recent television debate with centre-left leader Scholz, he gave vague answers when asked about the subject: “One can discuss anything, but certainly not at first.”
Scholz’s SPD – whom some speculate could end up in coalition with the CDU – backs loosening the strict rules to boost investment, a position shared by the Greens.
