"House on fire" in Germany: "The biggest mistake in economic policy

Written by Jeppe W

Nov.23 - 2023 5:28 PM CET

Photo: Shutterstock.com
Photo: Shutterstock.com

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Germany is currently facing a severe economic crisis, triggered by a constitutional requirement known as the "debt brake" that was introduced in 2009.

This ruling restricts the government's budget deficit to no more than 0.35% of the GDP, adjusted for the economic cycle, posing significant challenges for managing the national budget.

Recently, a court decision blocked the government's plan to transfer 60 billion euros of unused borrowing capacity to a "climate and transformation fund" intended to finance projects combating climate change and modernizing German industry.

The judges cited constitutional budget constraints and concluded that this transfer did not meet the constitutional requirements for emergency loans.

This development has resulted in a crisis meeting among German parties forming the government, as reported by the Norwegian financial newspaper Børsen. A government official described the situation as dire, saying, "The house is burning."

Jens Südekum, a professor of international economics at Heinrich-Heine-University, criticized the debt brake, calling it "the biggest mistake in German economic policy in the last 20-30 years." He added, "This stupid thing is now part of the constitution, and you can't get rid of it."

Peer Steinbrück, a former finance minister and one of the architects of the debt brake, now believes that the rule needs to be reevaluated. "We need a debt brake, but the one we have is clearly not in tune with the times anymore," he stated to Die Zeit.

During extraordinary situations like the coronavirus pandemic, German authorities can bypass the debt brake. One potential solution to the current crisis could be to suspend the debt brake retroactively to 2023.

The government is now faced with the challenge of finding an alternative way to finance the 60 billion euros in the German budget. The situation highlights the complexities and potential limitations of strict fiscal rules in times of economic and environmental challenges.

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