Germany's debt-brake drama

[Itsallaguess]

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The Telegraph articles written by Ambrose Evans-Pritchard are often interesting even if they are also a little too doom-laden with retrospect, but he wrote a piece last week on Germany's constitutional debt-brake that looks to be making it's way into wider media-outlets this morning, as the huge financial issues now look to be working their way through their political system -

Germany’s debt-brake drama is poison for Deutschland Inc and for Europe’s monetary union -

Economists have long warned that Germany’s constitutional debt-brake is a timebomb on a long fuse. That bomb has now detonated at the most critical moment in German economic history since the launch of the Wirtschaftswunder in 1949.

The Scholz government must plug a fiscal hole of €128bn to comply with a ruling by the top court, either by slashing spending, or by raising taxes or by bleeding investment in the rising technologies of the next half century.

Analysts at Citigroup estimate that €87bn of this must be covered over the next 13 months.

https://archive.is/MHjl9


The Times are this morning running with this story too, now that some of the above issues raised by Ambrose are coming to a head -

Fiscal crisis for Scholz after court ruling forces budget cuts -

Germany has been forced to patch together an emergency budget and declare a renewed fiscal “crisis” after a court ruling torpedoed the government’s spending plans.

The judges’ verdict has torn a €60 billion hole in the public finances, larger than the country’s annual defence expenditure, and left a shortfall of €18 billion for the 12 months ahead.

This has in turn led to political pandemonium as the three parties under Olaf Scholz, the chancellor, openly scrap with one another over where the cuts should fall and how deep they should be.

The conflicts stretch from €12.5 billion of investment in the creaking railway system to tens of billions in energy price relief for households and businesses.

The court judgment has also shaken some of the central pillars of Germany’s modern economic policy, including the state’s legal duty to keep public borrowing to a negligible minimum.

https://archive.is/gKWPr

This issue looks to have come to a point at completely the wrong time in a financial sense for Germany, given it's current post-COVID economic woes, and also at completely the wrong time in a political sense, given the growing rise of right-facing parties within their political system, as also now being seen elsewhere in Europe of course, and who will no doubt use any news like this to further their demands for change.

Cheers,

Itsallaguess

[RockRabbit]

This is only an issue because, unlike other countries, Germany has a constitutional debt-brake which prevents them from significant deficit financing like other countries except in "emergencies". ie what some would call 'sound money' policies. That is why Germany is in a much better fiscal position than the UK, rest of EU, USA etc.

They therefore now have four options:
1. Retain the debt brake.
2. Repeal the debt-brake (difficult politically, requires 2/3rds majority?)
3. Amend the debt brake to allow unspent funds to be carried forward to future years. (difficult see 2 above)
4. Declare an annual 'emergency' to allow deficit financing. eg climate emergency, Ukraine emergency etc. (most likely option)

Option 4 is of course a fudge, which would make Germany similar to the rest of the fiscal fudging world!

[ursaminortaur]

This is only an issue because, unlike other countries, Germany has a constitutional debt-brake which prevents them from significant deficit financing like other countries except in "emergencies". ie what some would call 'sound money' policies. That is why Germany is in a much better fiscal position than the UK, rest of EU, USA etc.

They therefore now have four options:
1. Retain the debt brake.
2. Repeal the debt-brake (difficult politically, requires 2/3rds majority?)
3. Amend the debt brake to allow unspent funds to be carried forward to future years. (difficult see 2 above)
4. Declare an annual 'emergency' to allow deficit financing. eg climate emergency, Ukraine emergency etc. (most likely option)

Option 4 is of course a fudge, which would make Germany similar to the rest of the fiscal fudging world!

Sounds more like the USA's debt ceiling where things will run to the line before a fudge is put into place.

[odysseus2000]

This is only an issue because, unlike other countries, Germany has a constitutional debt-brake which prevents them from significant deficit financing like other countries except in "emergencies". ie what some would call 'sound money' policies. That is why Germany is in a much better fiscal position than the UK, rest of EU, USA etc.

They therefore now have four options:
1. Retain the debt brake.
2. Repeal the debt-brake (difficult politically, requires 2/3rds majority?)
3. Amend the debt brake to allow unspent funds to be carried forward to future years. (difficult see 2 above)
4. Declare an annual 'emergency' to allow deficit financing. eg climate emergency, Ukraine emergency etc. (most likely option)

Option 4 is of course a fudge, which would make Germany similar to the rest of the fiscal fudging world!

Sounds more like the USA's debt ceiling where things will run to the line before a fudge is put into place.

The big difference between the US & Germany is cultural.

Americans, like us, have a culture of doing things at the last minute, wheeling & dealing all the way to the line & sometimes beyond it as the US did under Clinton. Germans by contrast like to have things ordered & settled so that there are no last minute maneuvers and no stress.

To get out of this the Germans will have to come together & agree to doing things that the German population have not experienced since the last war. In those 70+ years the German electorate have been schooled to believe in the power of the German manufacturing sector & endless prosperity. Now German electors have the ugly reality that a China dominated manufacturing sector is incompatible with their prosperity & taxation levels. This can all get very ugly quickly with ramifications for the EU in a world where Israel intends, according to their PM, to destroy Hamas bringing on a potential conflict with Iran. Images of struck matches & gasoline spring to mind.

Regards,