Germany Attempts To Escape Debt Brake

Because of the strict constitutional ceiling on borrowing, Germany has become more like those internet users who see advertisements promising lose-weight tricks or acquire millions.

To meet its climate obligations and upgrade its digital infrastructure, Germany needs to get prepared for €50bn ($57bn) a year in public investment.

But a “debt brake” inserted into the constitution in 2009 limits annual borrowing to 0.35% of nominal GDP, and changing the constitution looks impossible. With this vicious circle in the background, the three parties are in negotiation for a coalition agreement after an election in September.

Several tricks and tips are being attempted to solve the constitutional debt dilemma. The first is to establish off-budget public companies that can tap markets for funds devoted to specific aims such as charging stations for electric cars, for example, Deutsche Bahn, Germany’s rail giant, operates this way.

Another proposed solution is to beef up the KFW, the state development bank, to enable it to leverage private funds for green investment. In theory hundreds of billions could be raised this way, although EU’s Rules are another challenge.

Borrowing is still an option in 2022, exploiting the temporary suspension of the debt brake applied last year, which allowed the government to fund leave schemes and the like in the pandemic.

Experts have mentioned a sum of €500bn, to be spent over the next decade. But a badly designed scheme could attract the watchful eye of Germany’s constitutional court.

Dezernat Zukunft is a Berlin-based Think Tank that is responsible for another trick, as debt brake relies on estimates of the mysterious gap; namely the difference between GDP today and a measure of the economy’s potential.

The Think Tank suggests tweaking some of the inputs to that calculation because assuming more loose conditions in the labour market than the finance ministry does, for example, would raise the spending limit.