Breaking the Brake: How Germany’s Budget Crisis Threatens Its Coalition Government and Its Role in Europe

Germany’s "traffic light" coalition government, formed by the center-left Social Democrats (SPD), the environmentalist Greens and the pro-market Free Democrats (FDP), is already facing a major test, after it has taken office in 2021: how to deal with a constitutional court ruling that annulled its plans to use 60 billion euros (ca $66 billion) of leftover pandemic debt for a climate and transformation fund (KTF).

The ruling, which came as a surprise to many observers and policy-makers, has left a huge hole in the government’s budget and put its ambitious agenda of social, ecological and economic renewal at risk. It has also exposed the different fiscal philosophies and priorities of the three coalition partners, who have to find a way to reconcile their visions and deliver on their promises to the voters.

The court’s decision was based on the principle of the “debt brake”, a constitutional rule that limits the federal government’s structural deficit to 0.35% of GDP, except in cases of natural disasters or severe economic crises. The debt brake was introduced in 2009 as a response to the global financial crisis and was hailed as a sign of Germany’s fiscal prudence and stability. However, it has also been criticized as a rigid and outdated constraint that prevents the government from investing in the future and addressing the challenges of climate change, digitization and demographic change.

The coalition government has already announced that it will suspend the debt brake for 2023 by declaring a state of emergency, as it did in the previous years due to the pandemic and the Russian invasion of Ukraine. This will allow it to borrow more money and cover some of the expenses that were planned to be financed by the KTF, such as energy price controls, social housing and public transport. However, this is only a short-term solution and does not solve the long-term problem of how to fund the government’s investment program, which amounts to 50 billion euros per year until 2027.

The coalition partners have different views on how to deal with this dilemma. The SPD and the Greens are in favor of reforming the debt brake and allowing more fiscal flexibility for public investment, especially in areas related to climate protection and social justice. They argue that the debt brake is not compatible with the European fiscal rules, which allow for a higher deficit of up to 3% of GDP, and that Germany has enough fiscal space to borrow more at low interest rates. They also point out that the debt brake does not take into account the sustainability and profitability of public investment, which can generate positive returns and reduce future costs.

The FDP, on the other hand, is opposed to any changes to the debt brake and insists on maintaining fiscal discipline and balancing the budget as soon as possible. The FDP leader and finance minister, Christian Lindner, has made this one of his key campaign promises and has argued that Germany cannot afford to increase its debt level, which has already risen to over 70% of GDP due to the pandemic. He has also warned that loosening the debt brake would undermine Germany’s credibility and reputation in the European Union and the international markets. He has suggested that the government should finance its investment program by cutting spending in other areas, such as social benefits, subsidies and bureaucracy.

The budget dispute has the potential to create a serious rift within the coalition and endanger its stability and longevity. The coalition agreement, which was signed by the three parties in November 2021, states that the government will respect the debt brake and will not raise taxes, but also leaves room for interpretation and negotiation on how to implement these principles. The agreement also stipulates that the coalition partners will seek a “constructive dialogue” with the constitutional court and the parliament on the future of the debt brake and the fiscal policy.

However, the dialogue may not be easy or fruitful, as the court has shown a strict interpretation of the debt brake and has rejected the government’s arguments for using the pandemic debt for other purposes. The court ruled that the government violated the constitutional principle of budgetary truth and clarity, as well as the principle of democracy, by retroactively changing the purpose and timing of the debt. The parliament may also pose a challenge, as the coalition does not have a majority in the upper house, the Bundesrat, where the states are represented. Some states, especially those governed by the conservative Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), may oppose any changes to the debt brake and demand more fiscal transfers from the federal government.

If the coalition fails to find a compromise and a solution to the budget crisis, it may face a loss of confidence and legitimacy among the public and the voters, who expect the government to deliver on its promises and to address the urgent issues facing the country. According to a recent poll, 62% of Germans are dissatisfied with the government’s performance, and only 28% trust the coalition to solve the budget problem. The coalition may also face a risk of collapse, if one of the partners decides to withdraw from the alliance and trigger a new election. This scenario is not very likely, as none of the parties has an interest in ending the coalition prematurely and risking a worse outcome in the polls. However, it cannot be ruled out completely, especially if the budget dispute escalates and becomes a matter of principle and identity for the parties.

Another possible scenario is that the coalition continues to govern as a minority government, without the support of one of the partners, most likely the FDP. A minority government in the Bundestag would be unprecedented. This would mean that the government would have to seek the approval of the opposition parties, such as the CDU/CSU, the Left Party or the far-right Alternative for Germany (AfD), for each of its legislative proposals and budget plans. This would make the government more vulnerable and dependent on the whims and demands of the opposition, and would limit its ability to implement its agenda and to act decisively and coherently. It would also create more uncertainty and instability for the country and the European Union, which rely on Germany as a leader and a partner.

A minority government composed of the SPD and the Greens would have some advantages, such as a greater ideological coherence and a stronger focus on climate protection and social justice. However, it would also face some disadvantages, such as a weaker representation of the liberal and pro-business segments of the society and the economy, and a lower acceptance and legitimacy among the voters, who gave the FDP a significant share of the votes and expected it to be part of the government. Moreover, a minority government would not necessarily solve the budget problem, as it would still have to comply with the debt brake and the constitutional court’s ruling, unless it manages to change the constitution, which requires a two-thirds majority in both houses of parliament.

A third possible scenario is that the coalition breaks down and the SPD forms a new coalition with the CDU/CSU, reviving the so-called “grand coalition” that governed Germany for many years under Angela Merkel. This scenario would require a major shift in the positions and preferences of both parties, as well as a willingness to overcome the mutual distrust and resentment that accumulated during their previous cooperation. The SPD would have to abandon its claim to lead the government and accept a junior role under a CDU/CSU chancellor, most likely Friedrich Merz, who recently called Chancellor Scholz "a plumber of power" in parliament. The CDU/CSU would have to accept the SPD’s demands for more public investment and social spending, as well as a more progressive and pro-European stance on foreign policy.

A grand coalition would have the advantage of restoring political stability and continuity in Germany, as well as ensuring a broad representation of the mainstream parties and the majority of the voters. It would also have the potential to overcome the budget impasse, as both parties have expressed a willingness to reform the debt brake and to increase public investment, albeit with different degrees and conditions. A grand coalition would also have a comfortable majority in both houses of parliament, which would facilitate the legislative process and the constitutional amendments.

However, a grand coalition would also have some drawbacks, such as a loss of credibility and identity for both parties, who would have to compromise on their core values and principles, and to face the dissatisfaction and defection of some of their supporters and members. A grand coalition would also leave the opposition space to the extremes, especially the AfD, which would benefit from the discontent and frustration of some voters who feel alienated and ignored by the mainstream parties. A grand coalition would also reduce the diversity and dynamism of the political debate and the policy innovation in Germany, as well as the possibility of a genuine change and renewal of the political system and the society.

In conclusion, Germany’s current "traffic light" coalition government is facing a difficult and complex challenge in the face of the budget crisis, which has implications not only for its fiscal policy, but also for its political stability and its role in Europe and the world. The coalition partners will have to find a way to overcome their differences and to reach a compromise that respects the constitutional framework and the voters’ expectations, while also addressing the urgent needs and opportunities of the country. The coalition will also have to communicate and explain its decisions and actions to the public and to the other stakeholders, and to build trust and confidence in its ability and legitimacy to govern. The coalition has a historic opportunity to make a positive difference for Germany and for Europe, but it also faces a high risk of failure and disappointment.

Text: Microsoft Bing Chat with ChatGPT4

References

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Federal Constitutional Court. (2023, November 15). Second Supplementary Budget Act 2021 is void. Press Release No. 101/2023 of 15 November 2023. Retrieved from: https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2023/bvg23-101.html

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Politico (November 15, 2023). Top court blows €60B hole in Germany’s climate financing plans. Retrieved from: https://www.politico.eu/article/german-federal-constitutional-court-green-climate-financing-unconstitutional/

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