The “debt brake” which limits the State's ability to borrow gave rise to deep divisions within the government coalition during discussions on the Budget. To the point of pushing Chancellor Olaf Scholz to dismiss his Minister of Finance.
Germany is plunged into political fog. On Wednesday, Chancellor Olaf Scholz announced the dismissal of his liberal Finance Minister, Christian Lindner, effectively signaling the explosion of the ruling coalition.
This decision marks the epilogue of several months of deep differences on economic and budgetary policy within the government. At the heart of the disagreements between the liberals on one side and the social democrats (SPD) and the Greens on the other: the sacrosanct rule of the “debt brake” which limits the borrowing capacity of the Federal state and therefore public spending, at a time when Germany is seeking to revive an economy which is slowing down.
Established in 2009 after the financial crisis and enshrined in the basic law (the German Constitution), the “debt brake” limits the annual budget deficit to 0.35% of GDP. However, it provides that this ceiling could be exceeded in the event of a cyclical economic slowdown. In this case, the government must compensate for the unforeseen widening of the deficit once activity picks up. Also, this rule can be suspended “in exceptional emergency situations” which “exceed the control of the State and considerably affect its financial situation”, specifies the German Ministry of Finance.
A court decision at the origin of the budget crisis
This is how the “budgetary brake” was suspended exceptionally between 2020 and 2023, a period marked by the Covid pandemic and the war in Ukraine. Pausing the mechanism allowed the government to take on more debt in order to preserve the economy. However, some borrowed funds were not used. So much so that 60 billion euros of credits initially planned in the 2021 Budget to deal with the pandemic were transferred to a special envelope dedicated to green investments and support for industry.
A budgetary sleight of hand that did not pass the Constitutional Court. The institution finally canceled this transfer a year ago, claiming that the government had violated budgetary rules. On the one hand because these credits obtained in an exceptional context, thanks to the suspension of the debt brake, could not be used “during subsequent budgetary years” and should therefore have been spent in 2021. on the other hand, because they had to be “precisely attributable”. In short: they could not be used for purposes other than those for which they were decided, in this case to protect the economy during the pandemic.
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This ruling by the Constitutional Court triggered a real budgetary earthquake and plunged the government coalition into crisis, its members having been forced to return to the table to review their budgetary plans. Indeed, the Court's decision threatened key projects planned by the 2024 Budget. In reaction, some among the Greens and social democrats, such as the Minister of the Economy Robert Habeck, called for relaxing the rules of the “brake to debt”, which would have made it possible to create room for maneuver for investment. A solution that Christian Lindner did not want to hear about.
Displaying its deep divisions on the question of the Budget, the coalition still managed at the end of 2023, after tough negotiations, to agree to cover its financial needs by removing subsidies harmful to the climate, by reducing the expenditure of certain ministries and by reducing public subsidies. Christian Lindner won his case by obtaining the reinstatement of the “debt brake” from 2024.
A “bancal” compromise on Budget 2025
But the respite granted by the Budget agreement will ultimately only be short-lived. The discussions on the Budget, 2025 this time, once again highlighted the disagreements between the environmentalists, the chancellor's social democratic party and the liberals. The former once again pleaded for letting the deficits slip away to revive the economy and finance the country's rearmament in the face of the Russian threat, via a new suspension of the “debt brake”. A scenario still unacceptable for Christian Lindner who instead demanded 30 billion euros in savings for the next year.
Months of negotiations were necessary before the coalition reached an agreement on a Budget last July. Although it shows a hole of 17 billion euros to fill, the text still provides for 78 billion euros of investments and a level of borrowing compatible with the rules of the “debt brake”.
But a month later, a new twist: Christian Lindner wants to re-discuss the compromise on the 2025 Budget, which he considers “shaky”. According to him, the Constitutional Court could once again reject certain expenditure due to dubious reallocations of credits with regard to the rules of the “debt brake”. “This won’t happen to me a second time,” he said.
“He betrayed my trust”
For the coalition, this turnaround translated into a return to the negotiating table. But this time there will be no agreement. On Wednesday, Olaf Scholz deplored the “selfishness” of the leader of the liberals, who refused a compromise offer submitted to lift the blockages. “Too often, Minister Lindner has blocked laws inappropriately. Too often, he has engaged in petty partisan tactics. Too often, he has betrayed my trust,” the Chancellor said.
For his part, Christian Lindner declared that Olaf Scholz “unfortunately showed that he did not have the strength to allow our country to make a new start.” “Instead, the Federal Chancellor demanded from me a suspension of the 'debt brake'. I could not accept this, because it would have been a violation of my convictions,” he added.
Olaf Scholz still hopes to be able to hold out for a few months to lead a minority government and have a few pieces of legislation deemed a priority adopted, seeking majorities on a case-by-case basis. He opened the way for early elections in the country by submitting to a vote of confidence in mid-January, which he risks losing. As for the 2025 budget, there is uncertainty. Failing adoption in Parliament, a minimum and reduced version could be applied from January. A modification of the “debt brake” rules will, whatever happens, require a constitutional revision.
