Debt brake impedes survival

The democratic process may empower dangerous demagogues but it can also bring about necessary reforms. And so, as Donald Trump returns to Washington, Germany appears to be moving towards loosening the “debt brake” which forbids the country from borrowing more than the equivalent of 0.35 percent of its GDP each year and impedes growth. This limit was imposed through a constitutional amendment in 2009, when the German economy was booming and the only problem that the country and the European Union seemed to face was Greece’s debt crisis.

But when things got difficult, first with the pandemic, then with Russia’s invasion of Ukraine, the measure was suspended for four years. Now that it is back, it is clear what an impediment it is. The Social Democrat chancellor, Olaf Scholz, wanted to loosen the brake, but the leader of the conservative opposition CDU party, Friedrich Merz, would hear none of it. The Liberals, who were part of the Scholz government, chose to be thrown out of it rather than agree to loosening the brake. The country is now headed for early elections on February 23. Suddenly, Merz appears willing to discuss raising the debt limit.

What happened? If the polls are correct, Merz will be the next chancellor, possibly in a “grand coalition” with the Social Democrats. He will then face the impasse that troubled Scholz. The “brake” was instituted when Angela Merkel was chancellor, when the economy was growing and creating jobs. The eurozone’s structural problems benefited Germany, as the flight of capital towards the safety of its banks resulted in the government and German companies swimming in cheap cash.

At the time, (Russian) energy was cheap and America took care of Europe’s defense. It seemed that the whole world, and more and more people in Germany, were working for Germany. The government at the time, though, did not take advantage of the opportunity to build new infrastructure and to strengthen its military. Now that problems are mounting, Germany needs to break the borrowing limit of 0.35 percent of GDP. As Scholz noted, additional spending on defense should not be at the cost of investments and welfare programs. “I think that targeted, moderate reforms of the debt brake are possible. They’re being broadly debated,” Finance Minister Jorg Kukies said on Friday. He noted the need to “combine the existing fiscal solidity with better incentives for public investments in the future.”

Politicians broach the issue warily, as many Germans fear debt and inflation. If the populist parties on the extreme-right and extreme-left (AfD and BSW, respectively) gain more than a third of the seats in the Parliament, the governing coalition after the elections will not have the necessary majority to amend the constitution. If Germany cannot borrow as much as it needs to, it will face an economic impasse, a weakened military, and the need to cut welfare programs, along with all the social problems that this will cause.

This would benefit the extremist parties at home and the country’s enemies abroad. A wounded and even more introverted Germany will seriously undermine the political, economic and military credibility of the European Union. German members of parliament and others who participate in the public debate are aware of the need to contribute towards strengthening Europe. That is why dedication to strict economic discipline should not be an end in itself. Fortunately, the question of political survival, which democracy raises regularly through elections, drives politicians to become more flexible. In this case, this benefits their country and the European Union, too.