German Chancellor Olaf Schulz attends a meeting of the Bundestag on November 13, 2024.
John McDougall | AFP | Getty Images
When Germany’s government collapsed earlier this month, conflicts within the former ruling coalition over economic and budget policies were widely seen as key factors, with the country’s debt brake playing a central role.
Former Finance Minister Christian Lindner, whose dismissal was a turning point in the collapse of the governing coalition, told the media in early November that Chancellor Olaf Scholz had called for a suspension of the debt brake but that He could not accept the request.
Scholz fired Lindner that day, saying the former finance minister seemed unwilling to cooperate with Scholz’s recommendations for Germany’s 2025 budget. Scholz claimed that his plan incorporated ideas from Lindner’s party, but also made clear the need for more financial wiggle room.
Tensions over fiscal policy have long been simmering, heightened by ongoing concerns about the state of the nation’s economy, which has been teetering on the edge of recession for several quarters. one second read Third-quarter GDP released on Friday showed a quarterly increase of 0.1%.
As a result, the three-year-old alliance between Scholz’s Social Democrats (SPD), the Greens and Lindner’s Free Democrats (FDP) collapsed. Germany now faces snap elections in February.
But what is the debt brake?
What is a debt brake?
Germany’s debt brake, or “Schuldenbremse”, is a fiscal rule that forms part of the German constitution. The debt brake limits the amount of debt the government can take on and limits the federal government’s structural budget deficit to 0.35% of the country’s annual gross domestic product.
The agreement was reached in 2009 in response to the 2008 financial crisis and the German government’s high debt levels at the time.
In some exceptional circumstances, the debt brake can be suspended – as has happened, for example, during the Covid-19 pandemic.
German government debt Its debt-to-GDP ratio is just over 60%, according to the European Commission, which is lower than the debt-to-GDP ratios of other large euro zone countries.
When the debt brake was first implemented, its proponents argued that it would ensure a sustainable, responsible approach to public finances and spending. This remains a popular argument in favor of the policy to this day.
At the same time, critics say the debt brake is too restrictive and prevents the investment needed for future success.
Philippa Sigl-Glöckner, founder and managing director of think tank Dezernat Zukunft, told CNBC’s Annette Weisbach last week that the debt brake has led to “a huge lack of investment.”
She said infrastructure such as Germany’s train network and education were now being affected. “For me, it’s debt relief,” she said.
a point of contention
Views on the debt brake are divided among what is now the former ruling coalition.
Scholz’s SPD, for example, has repeatedly advocated reform of the debt brake, calling for a broader response to emergencies that deserve to be seen as worthwhile, such as climate change and the Russia-Ukraine war.
Lindner’s FDP has support Argues that debt brake rules must be adhered to and sees the Covid-19 pandemic, the climate emergency and the residual effects of the war in Ukraine as long-term challenges for the government rather than emergencies. However, it marked a shift in policy, with the FDP abstaining from the 2009 vote on adding a debt brake to the German constitution.
The debt brake has become more controversial after Germany’s Constitutional Court ruled last year that it was illegal for the government to reallocate emergency debt taken on during the Covid-19 pandemic into the budget. At the time, some observers and government figures argued that the climate crisis was also an emergency, but the court ruling stood.
Holger Schmieding, chief economist at Berenberg, told CNBC that the ruling, which imposes a “strict interpretation of the debt brake,” was the result of an internal debate within the league on “how to deal with the fiscal A key factor in the growing debate over “insufficient space”.
But while the debt brake is an important factor in government disintegration, Carsten Brzeski, global head of macro at ING, said other factors were also at play.
“While Lindner has shown some flexibility in the past, his almost religious insistence on the debt brake suggests it was politically motivated,” he told CNBC. “I think the government collapsed primarily for political reasons and personal reasons. tension.”
The future of the debt brake
With attention now turning to the upcoming election, questions have arisen about the future of the debt brake under the new coalition government. Polls show that the current opposition Christian Democrats will get the largest share of votes to elect the next prime minister.
If elected, the CDU could form a coalition government and strike a deal with center-left parties such as the Social Democrats or the Greens, Berenberg’s Schmieding said.
He predicted that the CDU and its Bavarian affiliate, the CSU, would agree to “moderate reforms to the debt brake to create fiscal space for more military spending and investment. In return, the center-left would agree to some pro-growth policies.” “Reforms include benefit cuts, fewer conditions for early retirement and lower business taxes.”
ING’s Brzeski also expects the debt brake to soften, but noted that any structural changes to the law would require a two-thirds majority in parliament because fiscal rules are part of the constitution – meaning The outcome will also depend on wider parliamentary decision-making.
Others are more hesitant, with DIW Berlin president Marcel Fratzscher telling CNBC’s Weisbach last week that he doesn’t think the new government “will really hit” the debt brake.
Public support for it is high and the country is “obsessed with savings and debt,” he said. Symbolic changes may come, he explained, such as how the structural components of the debt brake are calculated, “but they are not the fundamental changes we urgently need in Germany to boost public investment.”
At the same time, Brzeski believes that even without major debt brake reforms, Germany’s fiscal policy may still undergo some changes, such as through special purpose vehicles designed to fund investment.
“Regardless, I expect additional fiscal stimulus over the next five to 10 years to reach 1% to 2% of GDP. This will ultimately close the huge investment gap that has been growing over the past decade.”
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