Fiscal discipline is all too rare in governments. But enshrining a legal commitment to near-balanced budgets in the constitution has, for Germany, turned out to be a very bad idea. A constitutional court ruling enforcing a strict interpretation of the rule has thrown into jeopardy billions of euros of investment in modernising and greening its economy, which Chancellor Olaf Scholz has likened to a new industrial revolution. Though securing political consensus will be hard, the “debt brake” needs to be loosened, or scrapped.
The 2009 amendment to Germany’s basic law — intended to stabilise public finances after the global financial crisis — limits budget deficits to 0.35 per cent of gross domestic product, adjusted for the cycle, except in emergency. The government declared such an emergency after Covid-19 struck, and suspended the brake. When not all the funds earmarked for the pandemic were spent, to skirt around borrowing limits Scholz diverted €60bn of the money into a climate and transformation fund (KTF). This is intended to finance everything from charging infrastructure and hydrogen projects to battery factories.
The court in Karlsruhe ruled the KTF manoeuvre unconstitutional. The logic of its decision in effect brings down the curtain on off-balance sheet financing methods that successive German governments have used since 2009 to wriggle out of the straitjacket the debt rule imposes on public investment. Today, these include the €200bn Economic Stabilisation Fund, also first set up during the pandemic but repurposed to protect consumers from higher energy costs after Russia’s invasion of Ukraine.