A Happy German Three-way. Source: Sean Gallup/Getty Images
The German government finally agreed to its 2025 budget on Friday, August 16. The next day, it was reported, to surprise, that new military aid to Ukraine would be stopped. Only proceeds from frozen Russian assets would be contributed to the war (a questionable choice).
It is a decision that does not represent a change in Germany’s support for Ukraine. It stems from domestic thorns: a strict debt ceiling and a wobbly government.
Debt Limit
The main obstacle is the “debt brake” (Schuldenbremse). Introduced by Angela Merkel in 2009, it is a strict constitutional limit on new borrowing. Article 109(3) requires both federal and state governments to balance their budgets without relying on credit.
There are two features of this rule to consider:
Debt ceiling: Annual borrowing is limited to 0.35% of nominal GDP.
Exceptional circumstances: more borrowing is permitted in certain economic or emergency situations.
But there is more. Germany’s fiscal uptightness is a reflection of a strong cultural aversion to indebtedness. We all remember that little dust-up between Germany and Greece during the Euro Crisis in the 2010s
It was the British sociologist Geoffrey Ingham on the notion of primordial debt (owed by the living to their society’s future) that observed our etymological inheritance to the German language:
In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt,” illustrating the links between religion, payment and the mediation of the sacred and profane reals by “money.” For example, there is a connection between money (German geld), indemnity or sacrifice (Old English geild) tax (Gothic gild) and of course guilt.
The Nature of Money (2004)
It’s no surprise, then, that the German word Schulden, meaning "debt," shares its root with schuldig, meaning "guilty."
A norm exists, under the law, about public money in Germany. Its moral culture demands a balanced budget. Public deficits a source of public anxiety.
The result isn’t all that bad. Germany’s debt levels have been kept on such a short leash that they’re now among the lowest in Europe—falling consistently since the law was put into place.
Of course, that was until Covid.
Rocking the Boat
Like many countries, Germany expanded its deficits during Covid-19 to cover the enormous costs of pandemic measures. The emergency circumstances mentioned above were invoked. With borrowing, a huge emergency fund was established in 2021. Government debt as a percentage of GDP rose by nearly percentage points between 2019 and 2021.
Trouble arose in 2023 when the Covid-19 was not longer a justifiable emergency. With €60 billion remaining unspent in the emergency fund, the government attempted to repurpose it for a climate fund. However, the Constitutional Court ruled this unlawful, blowing a €60 billion hole in the budget.
The ruling coalition has been wobbling ever since.
In 2021, Olaf Scholz (SPD) stepped into Merkel’s well-worn shoes at the Chancellery. This time, they required a three-party coalition—a bit of a historical first in modern federal history. Olaf’s chaps took the crown as the biggest party. Then there were the Greens, surfing the crest of the green wave with all the enthusiasm of a seaside holiday. And the FDP, the smallest of the trio, centrist with a stern budget discipline. It’s their leader, Christian Lindner, that rules the budget as Minister of Finance.
Over time, these differences clashed. The latest budget was the result of a month-long standoff between the coalition partners. The FDP stood firm in defence of strict budget rules, while the other two parties pushed for a bit more room. The tension between them was palpable, a clear sign that their unity was beginning to strain under the weight of competing priorities.
And this whole time, all three parties have been losing political ground. This was obvious in the recent European Parliament elections in June, where the Greens plummeted to 12% from 20.5% five years earlier. In a recent Hamburg election, the Greens saw more blood, FDP a little, and SPD none.
Meanwhile, the far-right (AfD) is making leaps and bounds over the growing concern over immigration in Germany. The economy continues to struggle with chronic underinvestment. Real GDP growth is expected to increase by a promising 0.1% in 2024.
As the budget is squeezed under the debt ceiling, conflicts are chaffing in the coalition. The result is that Germany has had to limit its critical support for Ukraine.
With Chancellor Scholz's popularity declining, there is increasing chatter that the coalition partners might be better off going their separate ways before next year’s election. Each would, of course, swim off with a piece of the dinghy that was keeping the government afloat.
In other news
Left Bloc wobbles as one party threatens to remove Macron. (Le Figaro Fr)
UK GDP per capita grows. But still below pre-pandemic peak (BBC)
People leaving Sweden will exceed immigrants in 2024. (DW)
Poland’s PM Donald Tusk: “To all the initiators and patrons of Nord Stream 1 and 2. The only thing you should do today about it is apologise and keep quiet,” (Euronews).