Germany Holds Back Europe

Could this fiscal mistake by German politicians lead to the downturn of the German economy? Michel Santi shares his insights.

Jan 30, 2024 | By Michel Santi
German Chancellor Olaf Scholz (Image courtesy of Getty Images)

It was the most serious economic mistake made by Germany in the last 20 years. Celebrated at the time as a victory for fiscal and budgetary discipline, breaking away from the carelessness attributed to the vast majority of European Union members who were strongly encouraged to follow suit. Engraved in the marble of the nation’s constitution. Today, German politicians no longer know how to get rid of it.

The debt brake has become an impossible equation to solve, forcing the country’s leaders to resort to all sorts of accounting tricks or maneuvers to bypass it. In short, this strict and non-negotiable control of public deficits is very bad news for Olaf Scholz and his government. After all, how on earth can a country manage, in the current economic climate, with the constraint of limiting its structural deficit to 0.35 percent of the federal GDP, and additionally imposing budgetary balance on its 16 states? Not content with this uncompromising orthodoxy, Wolfgang Schäuble, Merkel’s Finance Minister who passed away recently, took great pleasure in tormenting what were then called “peripheral European nations” like Italy or Spain, even imposing the famous “Schwarze Null” prohibiting any new public debt.

In the end, Germany risks destabilising the finances of the European Union, and its own, having recently gone through an unprecedented budget crisis. Its political leaders are already discredited for having been sharply put back on the path of austerity by the nation’s highest constitutional court, which revealed the German government’s inappropriate creativity in its special arrangements to patch up holes. This executive ingenuity in creating special funds or vehicles, or trying to declare emergencies that are not, to circumvent this constitutional debt brake, further undermines a wavering chancellor, considerably eroding the little trust still granted to him and his government by the German people in full questioning and doubt.

In today’s Germany of early 2024, the recent and inevitably upcoming multiple strikes are far from insignificant. The coup de grâce of tax increases could well be dealt to the German people by their leaders cornered by this debt brake, which paralyzes and freezes everything in its path: support for Ukraine, social assistance, infrastructure restoration… In short, the crisis of confidence in German elites is now of unprecedented acuity, so much so that the former Finance Minister with a long political career, Peer Steinbrück, who was one of its ardent defenders, has admitted that the debt brake is no longer in line with the times.

This debt limit in Germany disregards the global dimension, significantly weakens both its own economy and the European projection power. How can Germany revolutionise its export-oriented mercantilist model if its public authorities are not even capable of subsidising its current and future companies active in the latest technologies, as the United States and China generously do? Once again, Germany’s stubbornness and go-it-alone approach undermine European ambitions.

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