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March 25, 2021

Europe

GERMANY: Hopes for greater post-election spending, the Green edition

BY Carsten Nickel

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( 5 mins)
  • The budgetary outlook envisages further borrowing this year and in 2022 but promises a return to the debt brake in 2023.
  • Green talk of scrapping the debt brake to allow for major investments contrasts with the party’s inclination to forming a coalition with the fiscally prudent CDU/CSU.
  • The constitutional court might have to look into the EU’s pandemic recovery fund, as politicians keep dodging a conversation with voters about fiscal integration.

In the short term, Chancellor Angela Merkel’s government keeps struggling with a third pandemic wave. This has destroyed any remaining hopes in her Christian alliance (CDU/CSU) for a 2022 return to the constitutional “debt brake”. Instead, Finance Minister and Social Democratic (SPD) chancellor candidate Olaf Scholz presented the cabinet with plans for a supplementary budget for 2021, envisaging another EUR 60bn in borrowing.

While overall borrowing would thus climb to EUR 240bn this year, Scholz also presented his medium-term fiscal outlook. It envisages a return to the debt brake in 2023, when the deficit is expected to fall to EUR 10bn. To that end, big spending requests from ministerial colleagues have been rejected, while fiscal reserves from previous years will be utilized. But there are still gaps in the outlook for 2024 and 2025, which Scholz wants to fill either with greater tax revenues or perhaps tax hikes. While the medium-term plan envisages annual investments of EUR 50bn until 2025 (and defense expenditure to climb to 1.5% of GDP in 2022), overall spending is intended to fall from EUR 550bn to around EUR 400bn by the middle of the decade.

How serious are the Greens?

The cabinet will likely endorse the 2022 budget and the medium-term fiscal outlook in the second half of June. But as in every election year, the final Bundestag decision will probably only be taken after the September election, once a new government is in place. Commentators are yet again ramping up expectations for greater spending after a German election. During the Merkel years, similar narratives were usually built around hopes for the allegedly “more pro-European” SPD to push Merkel’s bloc in that direction. This time is different only in that the Greens are supposed to be the instigators of fiscal movement. As always, normative arguments about the need for Germany to do more (on everything from digitalization to the green transformation) tend to replace a sober assessment of the political parameters.

Indeed, the Greens’ draft manifesto unveiled late last week calls for a relaxation of the debt brake and envisages new taxes; Green politicians are also calling for an investment fund of EUR 500bn over ten years to finance the climate transition. This is clever political marketing directed at liberal middle-class voters. But where the Greens rule in the regional states, they have mostly opted for conservative continuity, often alongside CDU/CSU – and hardly with negative electoral consequences. Coalition choice will be more important for policy than campaign narratives, and the Greens will likely want to govern with CDU/CSU. Tactical smartness does not equal a coherent, pro-spending course, combining realistic policy propositions with matching power options. The 2/3 Bundestag and Bundesrat majorities for altering the debt brake will not be available.

Back to Karlsruhe

Politically, it is simply too early to diagnose (yet again) a German turn to substantially larger spending. All parties are somewhat playing with respective notions, but the SPD finance minister promises a 2023 return to the debt brake, while the Greens are eying coalitions that run counter to any talk of scrapping that rule. The lack of clarity even from these two socially liberal parties means that there is still no serious debate about an alternative growth model. Structural reform debates have been entirely put to rest during the Merkel era; the pandemic fiasco – in many ways a result of structural weaknesses – is now absorbing all the attention. Instead, the medium-term fiscal and investment outlook will depend on the pace at which the prospects for Germany’s export-driven (and therefore, competitiveness-focused) economy recover.

The lack of debate also pertains to Europe. The Bundestag may today have backed the “own resources” decision, allowing the EU to issue debt to finance its recovery fund. But as with previous steps towards fiscal integration, the constitutional court might look into this. Karlsruhe’s “ultra vires” verdict on the EU Court of Justice’s assessment of ECB bond purchases might suggest a continued conversation about the boundaries of European treaties and national constitutional law. But the exit of former Court President Andreas Vosskuhle and his replacement with a judge nominated by the Greens could point in a somewhat different direction.

The last reformer

Indeed, Astrid Wallrabenstein began her court tenure with an interview in which she suggested that it was time to move beyond the conflicts of the past. This somewhat unfortunate statement might, in fact, make it harder for the court to disregard complaints against further fiscal integration. In any case, as long as politicians do not dare to lobby voters openly for constitutional change, the court will remain a key veto player.

A bold political reform proposal was last tabled almost two decades ago, in the form of Gerhard Schroeder’s welfare reform agenda. His relentless drive for change has transformed the German economy, sunk social democracy, and bought Merkel 16 years of time for highly skilled EU management – as well as domestic dithering. But Schroeders plan emerged out of the bitter post-unification slump of the long 1990s. Without a major crisis in Germany’s export-driven model, hopes for a comparably bold repositioning might be exaggerated.

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