February 26, 2020

GERMANY: False debt-brake alert (again)

BY Carsten Nickel

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Proposals from Finance Minister Olaf Scholz to temporarily suspend the country’s constitutional debt brake have been greeted with the usual excitement that tends to surround speculation about German fiscal expansion. Among those who quickly came out in favor of the idea was European Central Bank (ECB) President Christine Lagarde. But the plan has no chance to see the light of the day until the end of Angela Merkel’s chancellorship.

Scholz’s proposal is not new. The vice chancellor has in the past proposed to make use of record-low interest rates to finance a special round of one-off subsidies. These would be passed on from the federal to the municipal level, to settle the obligations of Germany’s most heavily indebted towns. Benefitting communities would be exclusively located in three West German states strongly affected by deindustrialization over recent decades: North Rhine-Westphalia (NRW), Rhineland- Palatinate, and Saarland.

A logic of pragmatism motivates the idea: record-low interest rates would indeed allow the federal level to get more involved in tackling some of the structural fiscal problems on lower political levels. At the same time, there are several political considerations behind this debate. One is that Scholz is still hoping to become the lead candidate for his Social Democrats (SPD) in the next elections.

Last weekend’s Hamburg election saw the SPD lose support, but it still did much better than in most other regional states. Scholz served as mayor of Hamburg before becoming finance minister and sees last weekend’s result as validation for the centrist and pragmatic SPD course he steered there before leaving for Berlin. His proposal is likely aimed at retaining that momentum, reiterating Scholz’s credentials on the federal level.

Scholz’s strategy seems to be to attract the pragmatically solidaristic parts of the political center at a moment when the new SPD leadership is too left-leaning, and Merkel’s Christian Democrats (CDU) are flirting with more conservative candidates such as right-winger Friedrich Merz. But even for the more centrist candidate for the CDU leadership, NRW state premier Armin Laschet, it could be challenging to respond to Scholz’s ideas, given how strongly his state would benefit. The same goes for the equally CDU-governed Saarland. Both states were also traditional SPD strongholds in the past.

In the short term, however, there is no chance for Scholz’s thought experiments to come true. His plan would require constitutional change, which would depend on a 2/3 majority in the Bundestag. This is entirely unrealistic, given how strongly Merkel’s CDU believes in the debt brake. Moreover, regional states that would not benefit have already strongly opposed the plan, from the affluent Bavaria in the south to Schleswig-Holstein in the north.

If anything, the debate might serve as a reminder of the previously discussed political preconditions for a more serious debate about loosening the purse strings in the future: A Green chancellor in a left-of-center coalition with Scholz’s Social Democrats (SPD) and the post-communist Left party as junior partners. Even then, the constitutional hurdle would remain a serious obstacle, and full political support within both SPD and the Green party should not be taken for granted.

Without such an at least somewhat more flexible government (or a major economic downturn with tangible labor market implications), however, the German ideology of the debt brake and the “black zero” is not even up for serious debate.

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