The pride of Germany

How the debt brake is becoming a dominant topic in the looming election campaign

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Life in Germany is still all about the pandemic. The lockdown (retail and restaurants are closed so are most of the schools and child care) that started in November was prolonged this week until 7 March. 

At least the number of infections is sinking steadily, although slowly. A few days ago, the Robert Koch Institute (German research institute responsible for disease control and prevention, short: RKI) announced that the seven-day incidence rate had fallen below the level of 70 per 100.000 – for the first time since October.

But support for corona measures is declining. Approval for the government’s pandemic policy dropped to 49 per cent, the lowest level since the beginning of the pandemic. 

The reason is, as the polling agency Institut für Demoskopie Allensbach wrote, that the majority is convinced that there are severe problems in the public sector, in particular: poorly equipped schools and a shortage of the health authorities (“Gesundheitsämter”) which are responsible for tracking and cutting infection chains.

Furthermore, the impatience of the sluggish vaccination campaign is growing. One and a half months after the start, less than four per cent of the German population is vaccinated. 

That is, among other things, a problem for politicians in Germany, mainly because other countries like Israel, the USA and Great Britain have advanced faster.

And there are also economic aspects of why the public is dissatisfied. There are more and more reports of the delay of financial support due to bureaucratic procedures. 

Furthermore, there is a growing debate in Germany about the rise of the debt burden. 

Like in many countries, state debt in Germany is rising during the pandemic. In 2021 debts from the federal and state governments plus local authorities will exceed 2019 by 450 EUR billions – an all-time high. It is expected that public debt will amount to 2.5 EUR trillions in 2021.

To make sense of these numbers, it is helpful to put them in perspective. In 2020 revenues at all government levels exceeded expenses by 6 per cent. And the so-called debt ratio, which is the debt as a share of the gross domestic product (GDP), will rise from 59.6 per cent in 2019 to 72.9 per cent in 2021. This number is still relatively moderate compared to other countries (Italy: 155.5 in 2020, USA: 131.1, France 115.4) but in Germany, stable public finances are of great value. And it is violating the so-called Maastricht financial policy requirements of the European Union that says that the overall debt level must not exceed 60 per cent.

These issues could become problematic for the ruling Christian Democratic Party (CDU) (in a governing coalition with the social democrats, SPD). 

A brand essence of Angela Merkel’s party is financial solidity. The CDU was the driving force of implementing the balanced-budget amendment, a constitutional rule requiring that a state not spend more than its income. The “Schuldenbremse” (“debt brake”) was introduced in 2009, and it applies to both the federal government and the German states (so-called “Länder”). 

The Basic Law permits an exception for emergencies such as a natural disaster or severe economic crisis, but the German parliament (Bundestag) has to give their approval. So it did for 2020 and 2021. But the law provides a repayment plan, and the question remains what will happen in the years beyond 2021. 

A few days ago chancellery minister Helge Braun, one of Angela Merkel’s closest aides, came under fire after his call for a suspension of Germany’s strict curbs on budget deficits. 

Braun wrote in an article for the newspaper Handelsblatt that Germany would “not be able to comply with the debt brake” in years to come and suggested the country’s constitution be amended to allow it to take on new borrowing.

This proposal by Helge Braun marks a sharp break with German fiscal orthodoxy. And although many people in Germany think that at a time when public spending has been massively ramped up to deal with the corona crisis, the brake is an anachronism. On the other hand sound public finances are also prefered by many Germans, and the Christian Democratic Party stands for this policy. If financial solidity is no longer central for the party it loses a core competence.

Mr Braun at least was harshly criticised by leading CDU politicians such as Armin Laschet, the CDU’s newly elected leader. He said members of the government should coordinate with the party before wading into such issues. 

Others were even more clearly. Eckhardt Rehberg, the CDU’s main spokesman on budgetary matters, said that for the CDU/CSU parliamentary group, “solid finances are non-negotiable.”

It is quite clear that solid-state finances will be an issue of the looming election campaign (there are federal elections (“Bundestagswahl”) on 26 September 2021, and six state elections (“Landtagswahlen”) in 2021).  

From a political economy point of view, it is predictable that it will take many years to repay the debt. Because taxes pay debts and neither party is keen on raising taxes, especially if one considers that the revenues can’t please particular interests but just reduce the debt level. So I guess what Helge Braun said will come to pass. But I bet that only a few politicians will repeat this during the election campaign. 

https://www.rki.de/EN/Content/infections/epidemiology/outbreaks/COVID-19/Situationsberichte_Tab.html

https://www.faz.net/aktuell/politik/inland/allensbach-umfrage-viele-deutsche-zweifeln-an-der-impfstrategie-17167579.html?premium (German, paid)

https://impfdashboard.de (German)

https://ourworldindata.org/covid-vaccinations

https://www.wiwo.de/politik/deutschland/schuldenquote-so-hoch-ist-die-staatsverschuldung-in-deutschland-und-der-welt-2020/26683850.html (German)

https://www.ft.com/content/c0379bc1-905a-4ca7-9749-16c506b443b9

https://www.handelsblatt.com/meinung/gastbeitraege/gastkommentar-das-ist-der-plan-fuer-deutschland-nach-corona/26850508.html (German)

https://www.iwd.de/artikel/deutschlands-schulden-steigen-496809/ (German)

Published by Johannes Eber

Berlin-based economist, senior consultant at Initiative Neue Soziale Marktwirtschaft (INSM) and co-founder of the media agency Solokarpfen.

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