Germans love their rules, sometimes more than the very thing the rules were devised to regulate.
At the height of the euro crisis, until it secured austerity programmes in exchange for bailouts, Berlin seemed to value the single currency rule book more than the single currency itself. Similar logic surrounds the so-called “debt brake”.
Devised during the 2009 global financial crisis, it was designed to secure sustainable public finances.
Then finance minister Peer Steinbrück introduced the instrument, limiting Germany’s structural deficit to 0.35 per cent of gross domestic product (GDP) as an effective antidote to politicians bribing voters with debt-financed projects at the expense of future generations.
On paper it’s been a huge success. Germany’s debt-to-GDP ratio stands at 62 per cent, just two points above the EU ceiling and the lowest of all G7 members.
Debt brake critics blame this rigid aversion to borrowing for Germany having the flattest economy in the industrial world: unable to borrow to invest in ageing railways and collapsing bridges, let alone artificial intelligence.
“The retailer is now facing dramatically increased costs”: Leo Crawford, former CEO of BWG Group
As old as the debt brake are the workarounds. After Russia invaded Ukraine, for instance, the euphemistic “special instrument” was introduced as a one-off €100 billion off-balance sheet fund to finance urgent spending on Germany’s ragged defence forces. As that conflict enters uncharted territory, however, it has been clear for months that the special fund is running dry just as Germany needs to ramp up defence spending.
Friedrich Merz knew that, but Germany’s chancellor-in-waiting won last month’s election with a principled promise to leave the debt brake untouched.
Just 10 days later that has gone out the window with new debt brake workarounds: a €500 billion fund for infrastructure and, effectively, a “whatever it takes” tab for defence spending.
After denying the reality of Germany’s spending needs for three years, Merz has revealed his pragmatic, Woody Allen-style approach to his debt brake principles: if you don’t like these principles, he has others.
