It is Germany’s version of Brexit — an act of national self-harm that has placed it at a massive disadvantage to its peers and “strangled its own investments in the future”.
That was the conclusion three young academics — Max Krahé, Philippa Sigl-Glöckner and Alexander Thiele — recently reached when assessing Germany’s “debt brake”, its constitutional curb on deficit spending.
It was “high time” to change it. “Without it there are only two options left — a permanent emergency without limits on debt, or a Germany that doesn’t invest and massively falls behind in economic terms,” they wrote in the newspaper Frankfurter Allgemeine Zeitung.
Their take was typical of the wave of passionate commentary and polemic set off by a landmark constitutional court ruling in November that touched off a political crisis and threw the country’s public finances into turmoil.
The judges in Karlsruhe said the government’s use of an off-budget fund to finance green projects and Germany’s industrial transformation had violated the debt brake, a fiscal rule that has been enshrined in the German constitution since 2009.
For many left-leaning politicians, there was only one sensible response to the verdict — the debt brake had to go. But that is not how the German public sees it.
For many, it has a hallowed place in the national consciousness, with echoes of the role of the National Health Service in the UK. According to a recent poll by Wahlen, 61 per cent of Germans want to maintain the debt rule in its current form, and only 35 per cent want it loosened.
Among economists, however, opinion is more mixed. A recent poll of economists by the Ifo Institute and FAZ found that 48 per cent want to keep it as it is, while 44 per cent advocate its reform. Some 6 per cent would like to see it abolished completely.
“The debt brake divides the profession into two equally large camps,” said Niklas Potrafke, head of Ifo’s centre for public finances and political economy. “Some see it as an anchor of stability, others as an investment blocker.”
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In force since 2016, the rule limits Germany’s structural deficit to 0.35 per cent of gross domestic product, adjusted for the economic cycle.
For years, politicians on the left have denounced it as an unnecessary straitjacket that badly constrains the government’s freedom of action. Robert Habeck, the Green economy minister, told a Green party congress in November that the debt brake was an anachronism, stemming from a time when “climate policies weren’t taken seriously, when wars belonged to the past, when China was the cheap workbench of the world”.
“With the debt brake in its current form we’re like a boxer who’s entered the ring with both hands tied behind his back,” he said. “The others put horseshoes in their gloves and we don’t even have our arms free.”
Others in the government, particularly the Social Democrats of Chancellor Olaf Scholz, share his views. But the third party in Scholz’s coalition, the fiscally hawkish Free Democrats (FDP), beg to differ.
Christian Lindner, finance minister and FDP leader, told public broadcaster ARD on December 17 that the priority for Germany must be to reduce its level of public debt, and so “ensure we’re able to act in future crises”.
He said the country had already made great progress on this path: its debt-to-GDP ratio had fallen to 64 per cent, from 69 per cent when Lindner entered government in 2021. And that, he added, must continue.
“For that reason and unless there’s a real need, we can’t just take on more debt than is allowed,” he said.
Supporters of the debt brake recall the dire situation Germany faced in 2009, with its state coffers emptied by reunification and the stimulus measures and bailouts pushed through during the global financial crisis.
“We are in a vice of debt,” Peer Steinbrück, finance minister, famously said as it was voted into law. Some 15 per cent of the budget was going towards servicing the national debt, he said.
Angela Merkel, then chancellor, even evoked a national symbol of thrift and prudence, the Swabian housewife, to justify the new fiscal orthodoxy.
In a speech in December 2008 touching on the financial crisis, she said the “schwäbische Hausfrau . . . would have shared with us this worldly wisdom: that in the long term you can’t live beyond your means”.
But the popularity of the debt brake also taps into something deeper: Germans’ aversion to debt.
The German word Schuld means both debt and guilt, a blurring of morality and finance that, according to the economic historian Carl-Ludwig Holtfrerich, is unique among big trading nations.
Yet ever since its introduction, the rule has proven controversial. Critics of the brake, which had to be suspended during the Covid-19 pandemic and the first two years of the war in Ukraine, say that it makes no distinction between debt raised to finance public investments and that taken out to cover normal state spending.
“[It] might work in theory, but in practice it’s too inflexible,” said Harald Fadinger of Mannheim university, one of the participants in the Ifo/FAZ poll. He said that when faced with the need to make savings, governments tend to slash investments rather than welfare spending.
The result, some experts say, is clear to see in Germany’s decaying infrastructure, chronically late trains and hopelessly analogue public administration.
“Considering how Germany ran down its public capital stock over the past 30 years and now faces additional challenges in the areas of climate and defence, reforming [the brake to allow exemptions for investments] would be important,” Fadinger said.
Some economists have proposed solutions that would leave the debt rule more or less intact. Michael Hüther, head of the German Economic Institute in Cologne, has called for the creation of a €400bn, debt-financed “transformation and infrastructure fund” to pay for badly needed investments in Germany’s railway and road network, its electricity grid, G5 mobile network and in charging infrastructure for electric cars.
The fund would be along the lines of the €100bn special investment fund for the German armed forces, created after Russia’s full-scale invasion of Ukraine in February 2022.
However, the chances that such a proposal could garner the necessary two-thirds majority in the Bundestag are slim. The opposition Christian Democrats (CDU) have shown little interest in the idea.
They also oppose any attempt to tinker with the debt brake itself, a rule they say prevents governments piling debt on to the shoulders of future generations. Carsten Linnemann, the CDU’s general secretary, said: “Doing so is like taking away the air they need to breathe.”