German Chancellor Olaf Scholz vehemently defended his government’s spending in a speech in parliament yesterday, even after a court decision on crucial debt rules triggered a budget crisis in the country. These are the key points of the crisis that began this month and is rocking Europe’s largest economy and threatening the collapse of the fractured three-party governing coalition led by Scholz.
What are the debt rules in Germany?
In 2009, when Angela Merkel was chancellor, Germany enshrined the so-called ‘debt brake’ in its constitution. This mechanism limits the government’s budget deficit to 0.35% of gross domestic product and is an emblematic symbol of Germany’s commitment to achieving balanced budgets – known as ‘schwarze Null’ or ‘black zero’.
The idea of strict spending limits gained traction in the early 2000s, and politicians were actually spurred into action by the 2007-2008 financial crisis, when debt and deficits soared.
This measure can be suspended in emergency situations as long as it is approved by the German parliament. This is what happened between 2020 and 2022, first due to the consequences of the coronavirus pandemic and then due to the energy crisis caused by the Russian invasion of Ukraine.
The ‘debt brake’ was supposed to come into effect again this year, but due to the budget crisis, Finance Minister Christian Lindner announced last week that the coalition government is trying to lift it again.
What caused the current crisis?
On November 15, the German Constitutional Court ruled that Scholz’s coalition violated the ‘debt brake’, in response to a complaint filed by the conservative opposition parties CDU and CSU.
At issue was a decision taken last year to transfer 60 billion euros in unused debt capacity from a fund intended to combat the effects of the pandemic to a ‘climate and transformation fund’.
The direct impact of the decision was to remove 60 billion euros from the climate fund, which was worth 212 billion euros. A move that could impact projects aimed at accelerating Germany’s transition to a zero-emission economy, as well as other projects expected to transform the industry – such as a series of investments in semiconductor projects recently announced.
But the decision also affects other off-budget funds, with the government now forced to account for the additional spending in its main budget.
How did the Scholz government respond to this court decision?
Projects under the Climate and Transformation Fund were initially suspended, followed by a broader freeze on future spending commitments.
Finance Minister Christian Lindner was forced to try again to lift the “debt brake”, a bitter measure for this budget hawk, whose party, the liberal FDP, firmly supported these measures.
Announcing this new development last week, Lindner omitted any mention of the word “debt brake,” instead referring cryptically to the introduction of a “supplementary budget,” and offering no further explanation. It was later up to the Ministry of Finance to clarify the details.
However, negotiations on the 2024 budget were suspended.
In a speech to the German parliament yesterday, Chancellor Olaf Scholz stressed that major government spending had been needed in recent years to cope with the double shock of the pandemic and the energy crisis.
“Over the past two years, Germany has been rocked by serious and unpredictable external crises,” he told delegates. “It has presented us with challenges that our republic has perhaps never before experienced with such focus and seriousness.”
Scholz also stressed that it would be a “serious and unforgivable mistake” to neglect Germany’s modernization, citing investments in chip and battery factories, areas where the government has provided large subsidies.
What are the broader implications of this crisis?
This budget crisis has fueled debate over whether the “debt brake” should be relaxed and raised questions about whether Scholz’s fragile three-party coalition could implode.
While Scholz’s SPD and the Greens are in favor of relaxing the rules, Lindner’s FDP appears determined to maintain the debt limit. At the same time, raising taxes is a common thread for the FDP.
In an allusion to the dispute within the coalition, Economy Minister Robert Habeck of the Greens emphasized on Monday that “all projects we come up with must be made possible”.
However, the opposition described the decision as a “political disaster”, and also on Monday Markus Soeder, the powerful leader of the CSU, added his voice to the call for new federal elections.
Source: DN
