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There are signs of a change in German economic policy: The obsession with the debt brake may soon be fading.
Olaf Scholz fired Finance Minister Christian Linder because he stubbornly wanted to hold on to the debt brake. This stipulates that the state budget must be fundamentally balanced and may only deviate in emergencies. For Lindner, the leader of the pro-business FDP, this fiscal policy tool is a sacred cow that cannot be molested, let alone slaughtered.
The debt brake is entirely consistent with ordoliberalism, the economic theory that still dominates German economics. According to this doctrine, the national debt is the first step to hyperinflationary hell. It's also popular with the population because people have been pushed into poverty twice in the last century due to this hyperinflation.
Angela Merkel and Wolfgang Schäuble are the parents of Debt Brake.Image source: EPA/DPA
German politicians, even the Social Democrats, therefore dare not resist the yoke of the debt brake. Angela Merkel introduced the policy in 2009, following the example of frugal Swabian housewives, and enshrined it in the constitution. Finance Minister Wolfgang Schäuble, now deceased, also insisted on a “black zero” in the state budget no matter what.
Germany's debt brake policy proved its worth during the euro crisis. With the euro weak, the export industry – especially the automotive industry – is firing on all cylinders. China has also opened up a new huge market. For a time, Germany was the proud world export champion.
As the largest economic power in the Eurozone, German politicians, especially Schäuble, also see themselves as not adhering to the national debt limit set by the Maastricht Treaty (3% of GDP for that year) The disciplinarian of the nation. , accounting for 60% of total GDP).
In the wake of the euro crisis, countries around the Mediterranean have particularly felt the impact of Germany’s crackdown. Not only were they given the unflattering nickname “Pigs,” but they also had to accept Germany's austerity policies and, thanks to the euro, had no option of devaluing their currency to ease their difficulties.
Debt brake hobbles German economy
Even the Germans lifted the debt brake for a short time during the corona crisis. With less funds needed to fight the epidemic than planned, there are still 60 billion euros left in the state treasury. The traffic light government hopes to use the money to invest in decarbonising the economy. The Constitutional Court later stepped in and blocked the request.
When it comes to public finance, the Germans are once again model students. This year's deficit is expected to be 1.75% of GDP, and total debt has fallen back to 64% of GDP. However, the economic environment has completely changed, and the sacred debt brake has become a huge burden on the German economy.
In an interview with Watson, economic historian Adam Tooze made a harsh judgment on Germany's economic policy: “Germany is pursuing the worst economic policy, especially after the new crown epidemic. German demand is weak, there is no investment, Technology is also lagging behind.”
In fact, the German economy has barely grown over the past five years. In 2025, people across the Rhine will also be happy if a recession can be prevented, because the automobile industry, the heart of the German economy, is already in trouble. The important Chinese market has collapsed as domestically produced electric cars have become significantly cheaper. The potentially intensifying trade war between the United States and China isn't making the situation any easier either.
Chinese cars are waiting to be shipped.Image: trapezoid
“Donald Trump is bad news for German business,” is the headline in the latest issue of The Economist. The returning president hates trade deficits, and the U.S. has a huge current account deficit with Germany. Last year the figure was $83 billion. Therefore, Mercedes, BMW and Volkswagen must prepare for higher punitive tariffs, especially as Volkswagen is already loudly considering closing factories.
The Germans will also have to suffer under Trump when it comes to the war in Ukraine. It remains to be seen whether and how this war will end. In any case, it is clear that Trump will shift the fiscal burden to a large extent to Europe, and thus to Germany. Putin's aggressive war has not only brought higher energy prices to the Germans, but also higher military spending.
Germany also needs to invest in infrastructure. Greetings to Dresden's collapsed bridges and the pitiful condition of the Deutsche Bahn. If the technological gap with the United States and China is not to become wider, massive investment in this area is also necessary.
All this can no longer be managed through the politics of Swabian housewives. “We need huge investments, and we need them soon,” Jens Südekum, professor of economics at Heine University in Düsseldorf, told the Financial Times. “A debt brake is impossible to do. to this point. “Therefore, it urgently needs reform,” Südekum continued. “Otherwise Germany will become ungovernable.”
Distance from Christian Lindner: Friedrich Merz.Image: trapezoid
Friedrich Merz, who may soon become Germany's next chancellor, is aware of this as well. He has therefore said on several occasions – most recently at an economic summit organized by the Süddeutsche Zeitung newspaper – that he is ready to at least reform the debt brake. However, Mertz stressed that debt can only be used for future investment and not for social spending.
Mertz is not alone in preparing to shake the debt brake. The CDU state princes now want the same. They suffer even more than the federal government. Berlin's CDU mayor Kai Wegener even declared that Germany was “ruined by austerity.”
In fact, you start to feel like you're making a fool of yourself in Berlin. Germany is firmly committed to austerity, while the US national deficit currently stands at 7% of GDP. Many economists believe the national debt will rise further under Trump. France will once again fail to comply with Maastricht standards, let alone Italy.
Friedrich Merz spent time in the political desert at Blackrock; he was familiar with Anglo-Saxon economics. They don't know about the debt brake obsession. Merz has a lot of hard work to do if he wants to wean his countrymen off this superstition. Not only must he first win the election, but he must then convince the Karlsruhe Constitutional Court of the legality of his actions.
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