The Domestic Political Economy of Germany’s Debt Brake

The SPD and the Greens, the two left-of-center parties in Olaf Scholz’s traffic light coalition, along with their supporters in the media and academia, are continuing to make a lot of public noise about the need to relax Germany’s debt brake.   

That is very evident in the current hard-fought negotiations over next year’s German budget.

The SPD and the Greens perform this political dance even though they know full well that, for the next two years, it is virtually impossible to bring that goal about. 

Stating that is simply a matter of political realism and power politics. Why then is this fact not addressed more openly? Because it is not in the interest of either political camp to be honest with the public at large, never mind the world outside Germany. 

For the time being, the CDU/CSU, Germany’s main opposition, has no interest to change its current stance of rejecting any relaxation of the debt brake. It will only do so once it again leads the German government. The next federal elections are to be held in the fall of 2025. 

Why help Scholz?

The center-right opposition is understandably disinclined to give the wobbling government led by Olaf Scholz any shot in the arm.   

The CDU also anticipates having complex negotiations in the future, likely with the SPD as its junior coalition partner then, over any relaxation of the debt brake when it comes to negotiations over forming a government. With the SPD in power for now, it is a matter of political expediency not to give any negotiating advantage by doing a deal now.

This applies all the more so as it is also evident that the Greens and SPD —no matter how hard they currently try to present themselves as serious managers of public investments — are both very attached to the continued expansion of the already richly endowed German welfare state.   

Any relaxation of the debt brake negotiated now, under the aegis of the SPD and Greens, could hardly be drawn narrowly enough to counteract a further expansion of the consumptive — not investment — parts of the German federal budget. 

No debt brake reform now without (early) elections

Given those circumstances, the only conceivable way for the SPD and the Greens to bring about the desired easing of the debt brake as soon as possible would be to open up the path for new elections.  

That is unlikely to happen for a host of reasons. One of them is that Mr. Scholz is highly unlikely to ever agree to that procedure. Another is that, for many members of the governing coalition, a premature election would run counter to their own material self-interest. 

A significant share of the current members of the German Bundestag from the ranks of the SPD and the Greens have to fear not getting re-elected. There also is the matter of any retirement credits as an MP being contingent upon at least completing a four-year term in full.  

Another reality is that a large swath of the junior members of the government parties currently serving in the Bundestag would probably have to accept a considerable loss of income. Indeed, in many cases, they are unlikely to earn similarly high incomes in the labor market, at least for the foreseeable future, as they now receive as MPs. 

Disadvantage: Germany

The loser in all these political stratagems is the Federal Republic of Germany. The country is already way behind where it needs to be with executing long-overdue structural reforms and has a long list of investments that need to be made.  

In general, the case for allowing long-term investments designed to improve the growth potential of the German economy via the federal budget is quite compelling, given the country’s comparatively low level of public debt. 

However, the evidence to date is that significant parts of any special budgetary measures (such as the special €100 billion defense budget) are then not used for investments but consumed by rapidly rising personnel costs. 

The most insincere political players in this game of head fakes are the leaders of Olaf Scholz’s SPD. They leave no opportunity unused to claim that Germany’s crumbling infrastructure is solely the fault of the austerity policies pursued by the CDU/CSU under Mrs. Merkel.  

Conveniently ignored 

The fact that the SPD was Merkel’s coalition partner for much of her 16 years in office is always conveniently ignored. So is the fact that the SPD shunned investments in the Merkel years in favor of pushing through a steady increase in social spending. 

The final part of injecting the correct dose of political realism into the future German debate over the debt brake concerns the political stance of the CDU/CSU.   

A significant portion of its voters are currently hoping that a future Federal Chancellor Friedrich Merz would act with a firm hand on the matter.   

Perhaps so. However, traditionally, the key priority of the CDU/CSU — rather than acting consistently in terms of policy— has always been on maximizing its claims to power and ministerial posts. 

Conclusion

Enabling a constructive, but also sufficiently restrictive easing of the debt brake by implementing an enforceable limitation to public investment activity, is definitely a goal worth pursuing.   

Whether a future CDU government, even one led by Friedrich Merz, would stay the course of budgetary strictness is an open question.  

That would also apply if the CDU would select the Greens to form a coalition government. Like the SPD, it has a strong left wing and, whatever else it may claim, is very much focused on expanding welfare spending.