Germany's 'debt curb' rule helped collapse government - What's next?!
When the German government fell earlier this month, clashes within the former ruling coalition over economic and budgetary policy were widely cited as a key factor with reining in the country's debt playing a central role.
Former Finance Minister Christian Lindner, whose sacking was the tipping point for the breakup of the ruling coalition, told the press in early November that German Chancellor Olaf Scholz had asked for a pause on the debt curb, a demand he could not accept. .
Scholz had fired Lindner the same day, saying that the former finance minister did not seem willing to cooperate on Scholz's suggestions for Germany's budget for 2025. Scholz claimed that his plans included the ideas of Lindner's party, but also clearly demonstrated the need for more financial freedom.
Tensions regarding fiscal policy had been long-standing, heightened by ongoing concerns about the state of the country's economy, which has been on the brink of recession for several quarters. A second GDP reading for the third quarter released on Friday showed a 0.1% increase from the previous quarter.
And so the three-year coalition between Scholz's Social Democratic Party (SPD), the Green Party and Lindner's Free Democratic Party (FDP) fell apart. Germany is now facing snap elections in February.
Germany's debt brake, or 'Schuldenbremse', is a fiscal rule that is part of the German constitution. The debt brake limits how much debt the government can take on and dictates that the size of the federal government's structural budget deficit cannot exceed 0.35% of the nation's annual gross domestic product.
It was agreed in 2009 in response to the 2008 financial crisis and the high debt the German government had at the time. In some exceptional circumstances, the debt brake can be suspended, this happened for example during the Covid-19 pandemic.
Germany's government debt is just over 60% of its gross domestic product, according to the European Commission, which is below the debt-to-GDP ratio of other major eurozone countries.
When the debt ceiling was first implemented, its advocates argued that it would ensure a sustainable and responsible approach to public finances and spending. To this day, this remains a popular argument in favor of the policy. Meanwhile, critics say the debt curb is too restrictive and has hindered the investments needed for a successful future.
In the former governing coalition, views on debt containment were different. Scholz's SPD for example has repeatedly advocated a reform of the debt curb, calling for a wider scope for what could be seen as a valid emergency situation for its suspension, for example changing the climate and the Russia-Ukraine war.
Lindner's FDP has supported the view that the debt ceiling rule should be respected and has argued that the residual effects of the Covid-19 pandemic, the climate emergency and the war in Ukraine are long-term challenges for the government and not emergency situations. However, this marked a change in policy, as the FDP abstained in the 2009 vote to add debt curbs to the German constitution.
The debt curb became even more controversial after Germany's constitutional court ruled last year that it was illegal for the government to redeploy emergency debt taken out during the Covid-19 pandemic to the budget. At the time, some observers and government figures argued that the climate crisis was also an emergency, but the court's ruling stood.
As attention now turns to the upcoming election, questions about the future of the debt curb under a new coalition government have emerged. Polls suggest that the current opposition party, the Christian Democrats, will secure the majority of the vote and therefore provide the next chancellor.
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