FDP Lindner defends Germany’s debt ceiling as ‘inflation brake’

Germany’s Finance Minister Christian Lindner has defended the country’s constitutional ‘debt brake’ against criticism from his coalition partners, arguing the ceiling also works as an inflation-control tool.

After the national constitutional court’s ruling aggravated the government’s budgetary constraints last year, the head of the pro-market FDP party stood by the rule at an event in Berlin on Monday (15 April). He said it helps the government set the right objectives and prevents what he sees as costly public spending.

The country’s strict ‘debt brake’, which limits annual budget deficits to 0.35% of the GDP, adjusted for the economic cycle, has come under sharp criticism over recent months, including from governing parties SPD (S&D) and Greens – who argue it hampers public investments.

“There has been a regular discussion over the past 15 months about whether Germany should not pursue an expansionary fiscal policy,” he said, referring to the ongoing debate around the introduction of a subsidised electricity price for heavy industries and calls to replicate the USA’s Inflation Reduction Act (IRA).

Lindner said the country could avoid both options thanks to the debt brake.

“Our moderately restrictive fiscal policy, [hinging] on the debt brake, is moving inflation in the right direction, namely towards the 2% mark, while in the US, we are seeing enormous budget deficits that will cost an enormous amount in interest payments over the next few years,” he added.

While US inflation dropped from around 9% in mid-2022 to 3% in June 2023, it has climbed back to 3.5% in March 2024. Inflation in Germany, in contrast, peaked at 8.8% in November 2022 and slid gradually to 2.2% in March 2024.

Lindner argued that Germany’s debt brake has prevented driving up prices through higher government spending, thus also working as an “inflation brake”.

His comments contrast sharply with statements from both the business community and trade unions, who have hailed the US’ subsidy scheme for driving investments into new manufacturing sites, warning that Europe risks being left behind in industrial sectors that show promising growth potential.

While the US economy grew by 2.5% in 2023, Germany’s output fell by 0.3% during the same period.

Debt or no debt? German coalition parties drift further apart

Germany’s Finance Minister Christian Lindner took aim at his coalition partners’ stance on the country’s debt brake rules on Wednesday (13 March), underscoring the widening divide between the country’s three ruling parties.

Lindner claims ‘only minor reforms needed’

The debate over Germany’s constitutional rule has intensified after a November 2023 ruling by the country’s top court limited options to circumvent the rules by using a crisis-related exception.

“The ruling of the Federal Constitutional Court has greatly tightened the application of the debt brake, even in a way that would not have been necessary in my view,” Lindner acknowledged. 

However, while showing openness to some minor reforms on applying the debt brake, such as calculating the cyclical adjustment and the repayment of the crisis-related debt, Lindner said that “at its core”, no changes to the constitutional rule were needed.

Lindner’s view was partly backed by Lars Feld, an economist at Freiburg University and government advisor, who recently published a paper arguing that, since its introduction in 2009,  the debt brake has not led to a decline in public investment.

However, Feld pointed out that “the fact that little has happened in terms of investment over this entire period is also because the state’s investment activity had already declined significantly beforehand, particularly at the municipal level, which is not directly affected by the debt brake.”

The Brief – The Keynesian times are over

Faced with the far-reaching implications of the COVID-19 pandemic in 2020 and a global energy crisis from 2021 onwards, European governments have embraced a Keynesian approach, spending billions to keep companies afloat and help consumers. But those times are over.

Economy not independent from public demand

According to Feld’s study, public investments have been lower in Germany than in most other rich economies since 1995, reaching an average of only 2.3% of GDP, compared to 3.7% across OECD countries.

This was, however, not due to a lack of funds but “rather a consequence of bureaucracy, high planning and authorisation costs as well as staff shortages and a lack of skilled labour.”

In Lindner’s view, it is not clear that higher government expenditure could be absorbed by the economy “without being at the expense of private projects”, given its current economic capacity.

He said, “We would not gain much if we were to finance new, additional public projects at the expense of additional production facilities.”

However, this claim was disputed by Leonard Mühlenweg, an economist at think-tank Dezernat Zukunft.

“Economic capacities are not independent of public demand,” Mühlenweg told Euractiv. “In the past, excessive austerity reduced the potential of the economy. There is a real danger of this happening again,” he added.

Given its current restrictions, Germany was on course for a debt-to-GDP ratio of 40%, which is way below the 60% foreseen in the EU’s Maastricht criteria and its current level of 64%, he said, pointing to a paper by the German Council of Economic experts.

“Another major problem is that the current German fiscal policy is defined by a lack of long-term perspectives,” Mühlenweg said, adding: “This is introducing a lot of uncertainty, which ultimately also threatens private investments.”

[Edited by Anna Brunetti/Alice Taylor]

Read more with Euractiv

Letta to call for US-IRA-style funding, pan-European state aid contribution scheme

Europe must urgently enact measures to push a “competitive industrial strategy” rivalling the US Inflation Reduction Act (IRA), including through an EU-wide state aid contribution mechanism, Enrico Letta will tell the 27 EU leaders in a special report on Thursday.