With Merkel out, Germans discussed famous budget discipline


When Chancellor Angela Merkel’s government broke its debt taboo and turned on the money spigots to help the German economy weather the pandemic crisis, it vowed to return to fiscal toughness as soon as possible.

But as the post-Merkel era approaches, voters may have other ideas.

In the last run-up to the September 26 polls that will see Merkel exit after 16 years, polls show her CDU-CSU alliance lags behind the centre-left Social Democrats (SPD).

Hoping to turn the tide, the Conservatives are back on their favorite lines of attack.

SPD leader Markus Soeder warned the SPD’s candidate for the top position, Finance Minister Olaf Schulz, not to be a “debt adviser”.

Conservative millionaire Frederick Merz, the CDU’s economic policy spokesman, said taxpayers would end up footing the bill for the SPD-led government’s “free beer” policies.

Schulz himself has said he wants higher taxes for high-income earners and the reintroduction of a wealth tax to help fund much-needed investments in Europe’s largest economy.

Whoever wins, any future German government will face a “difficult choice” between “changing the budget rules” to suit economic realities, or “sharply reducing the public deficit,” says Patrick Artus, chief economist at Natixis.

Germany’s balanced finances have been turned upside down during the pandemic, with the Merkel government taking on 370 billion euros ($438 billion) in new debt in 2020 and 2021.

Total public debt is expected to exceed 70 percent of GDP this year, up from 59.7 percent before the pandemic.

– I am watching –

Germany under Merkel is known for its budget discipline – and at times for imposing it on fellow Europeans – but pandemic spending forced it to suspend the “debt brake” written into the constitution in 2009.

The law prohibits the government from borrowing more than 0.35 percent of its GDP, except in “exceptional circumstances” approved by Parliament.

Between January and March of this year, the public deficit exceeded 80 billion euros, equivalent to 4.7 percent of GDP.

It’s a long way from Germany’s cheerful “black zero” budget – the acronym given to balancing the books and the goal the country consistently achieved between 2014 and 2019.

The crisis also saw Merkel lead the EU’s €800 billion coronavirus recovery fund, which will be financed by joint borrowing for the first time – crossing a German red line on pooling EU debt.

But European members watching the elections and hoping for a shift in German debt positions may be disappointed.

With a battle over easing strict EU budget rules looming, Schultz ruled out any changes at the latest meeting of EU finance ministers.

He said the pandemic showed that the bloc’s financial rules already had enough flexibility.

– ‘Huge amounts’ –

By Merkel’s own admission, Germany will have to “spend huge amounts of money in the coming years”.

Marcel said the country’s biggest challenges – energy transformation, climate protection and digital infrastructure – mean that “40 to 50 billion euros of public investment per year, between 1 and 1.5 percent of GDP, will be required over the next 10 years”. Fratzscher is president of the DIW Center for Economic Thought.

To solve this budget equation, Fracher said, it would be necessary to “fix” the debt brake to reflect the standards of the European Union, which carries a deficit of up to three percent of GDP.

The problem: Any change to the debt rule must be approved by a two-thirds majority in the German parliament.

– Another road –

“The ruling parties have to find another way to get around the rule,” Fracher said.

Much will depend on the balance of power between the parties in the next German coalition.

And Fracher said holding on to the debt brake would be “impossible without tax increases” – something the Conservatives have ruled out.

The left-wing Green Party, fantasizing about their chances of being part of the next government, wants to adjust the debt brake to allow 50 billion euros to be borrowed for investment annually until 2030.

The SPD is open to more public spending, but within the limited range that the constitutional brakes allow.

jpl-sea / mfp / lth

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