BERLIN: Only unforeseen circumstances could prevent Friedrich Merz, the hard-talking chief of the CDU conservative party, from heading the government of Europe’s largest economy after the general elections in February. With the country barely growing after a two-year-long recession, Merz will push for a German version of shock therapy. That will only work if he finds creative ways to loosen the “debt brake” that for 15 years has been the main obstacle to sensible fiscal policies.
Merz does not want to scrap the measure forcing German governments to contain the federal budget deficit within 0.35 per cent of GDP. He has been a fierce advocate of the measure, which was voted into the constitution in 2009. But he can’t tackle the country’s woes just by scrapping welfare payments and reducing bureaucracy – his only two economic ideas for now.
The CDU leader is a determined proponent of keeping German aid flowing to Ukraine – just as current Chancellor Olaf Scholz is. But Merz knows it would be difficult to do that while abiding by the rigid fiscal rule. He said in November that he might be open to reforming the debt brake on the condition it was not used to finance welfare transfers or stimulate consumer spending.
There are ways to amend the rule. The five-strong German Council of Economic Experts, tasked with advising the government, some of them earlier in 2024. It suggested that the 0.35 per cent limit could be raised if the country’s debt load is below a certain level. Germany’s current debt to GDP ratio, at around 62 per cent of GDP, is one the lowest in the euro zone. The advisers also advocated more flexibility when the government needs to suspend the debt brake in cases of national emergency or in bad economic times.
Even those reforms would need a constitutional amendment. Merz, whose CDU is expected to receive about a third of the popular vote, will have to govern with other parties. Building a new “Grand Coalition” with Scholz’s Social Democrats is the most obvious option. But even then, the two traditional parties may not muster the two-thirds of MPs needed for such changes.
But change is imperative because the German economy has been shackled by the debt brake for too long. The dearth of public investment has resulted in decaying infrastructure, poor network connections, declining productivity and the inability for Europe’s largest economic power to fund priority tasks like defence spending or the green transition. A change of government and the release of the debt brake offer a chance to end 15 years of economic nonsense. — Reuters
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