The Green Deal Slams into the Debt Brake - EU Ag Newsletter #5

By now you have heard about the €60 Billion ?? oopsie in the German budget, as ruled by their highest court. Yes, indeed the debt brake (Schuldenbremse) strikes again like a ghost of recessions past ??. The debt brake is a rule that Germany imposed on itself... (checking my notes here... ) during the 2008 global financial meltdown ??.

Are you serious?!?! ?? And now Germany is having to dream up all kinds of budgetary Ju-Jitsu ??♂? to sidestep its own (too harsh) rules.

The Debt Brake vs the Need for Green Infrastructure

Okay, even though the debt brake exists to prevent the public deficit from exceeding .35% of the gross domestic product... it's not that big a deal

(As a reference the U.S. is usually about 3-4%, France 4-5%, Italy is about 5%, and UK is about 5%)

So yes, .35% is crazy low. And anyone who has ridden on a German train recently can see the impact of not investing in infrastructure. And to their credit, the German government knows it needs to spend a LOT more in the face of the seismic economic shift that is underway.

So yes, the government moved €60 Billion from the COVID Emergency Response fund to the Klima- und Transformationsfonds (Climate Transformation Fund), or the KTF. The KTF is scheduled to spend €212 Billion over the next three years to speed up the climate transition via infrastructure and service transition spending.

Alas, the constitutional court said, "Nine." So here we are, of the €60 B, that puts them about €49 B over the .35% threshold.

So what should they do?

I propose they declare a climate emergency and run the deficit as high as they need. (Declaring an emergency is a huge loophole in the rule). Since, it's unlikely they will be able to remove the constitutional provision for the debt brake, and the provision has outlived its usefulness. German bonds are priced at a 2.5% yield and have been in that range (0-3%) for ten years, signaling a large global demand for German debt.

Realistically, there is no other way to fund this level of investment, this quickly.

But instead, let's try to raise the money by cutting benefits and raising taxes

But it is Germany we are talking about, they love the fact the debt-brake exists. So, as an emergency, they thought it was a good idea to shave a few small benefits.

One of the benefits that farmers in Germany used to enjoy was a tax break on farm diesel. However, the government recently announced its plan to stop this tax break just in time for the Christmas season ??. This decision was met with anger from farmers, who organized protests with lines of tractors by the Brandenburg gate ??. Even the Agriculture Minister, Cem ?zdemir, joined in the protests, arguing that farmers have no alternative to diesel.

While it is true that farmers may not have a viable alternative at the moment, Germany as a country does have other options for funding the Green transition ??. It remains to be seen whether the government can come up with creative solutions in the months to come ??.

(all opinions belong to the author and are not associated with any company, government or organization)