Battle for the budget: will Germany cancel the “debt brake” for the sake of defense and support for Ukraine
The German establishment is feverishly discussing the abolition of the “debt brake” – a legal restriction that prohibits the government from exceeding the national debt ceiling of 0.35% of GDP per year. This would open up the possibility of attracting additional loans for a significant increase in the defense budget and expansion of support to Ukraine.
Scholz seeks financing for Ukraine: between debt limits and political struggle
Chancellor Olaf Scholz stated, that support for Ukraine should not come at the expense of cuts in other budget expenditures, pensions, or infrastructure projects, and that additional funding should be found. He noted that there is no majority in the parliament that would support stopping the “debt brake” to finance aid to Ukraine and other policies.
It has been in the state for a long time continue bitter disputes over these financial restrictions. The Social Democrats and the Greens consider them archaic and as preventing investment in critical areas, primarily defense and infrastructure. Instead, conservatives from the CDU insist that these rules are necessary to preserve the financial stability of the state. The current legislation allows to abandon the “brake” only in exceptional cases, as was the case during the pandemic.
Early elections expected on February 23 add to the tension. According to surveys, is leading Christian Democratic Union headed by Friedrich Mertz. Scholz supports increasing aid to Ukraine, but it is not yet clear whether it will be financed by increasing national debt. Perhaps the conservatives will offer other ways to get money.
Scholz’s political initiative is multi-vector. He seeks to show support for Ukraine ahead of the election and change financial regulations opposed by his opponents. This forces conservatives to choose between increasing the debt or appearing opposed to aid to Kyiv.
The proposal is also a response to Trump’s statements and underscores Berlin’s willingness to take on greater responsibility for Europe’s security. The success of this initiative depends on Scholz’s ability to convince the parliament of the reality of the threat and the need for urgent action.
Germany at a political crossroads: the collapse of the “lighthouse” coalition, early elections and the issue of support for Ukraine
We will remind that after decay of the “lighthouse” coalition, which united the Social Democratic Party of Germany, the Free Democratic Party and the “Greens”, the political landscape of Germany underwent serious changes. The alliance faced disagreements over financial policies that led to its collapse.
Minister of Finance Christian Lindner from VDP denied against Scholz’s proposal to suspend the “debt brake” to increase defense spending and support Ukraine. He insisted on strict budgetary discipline and proposed spending cuts instead of new borrowing.
Due to the inability to reach a compromise between the coalition partners, Lindner was dismissed as finance minister, and the VDP left the government. This led to the collapse of the coalition and advertisement early elections expected on February 23.
The Green Party supported an increase in aid to Ukraine, but had disagreements with the VDP regarding the budget. Foreign Minister Annalena Burbok criticized Scholz for blocking additional aid to Ukraine and accused him of using the issue for an election campaign.
The collapse of the coalition and the upcoming elections create uncertainty about Germany’s future political course, especially in the context of support for Ukraine and financial policy. The election results will determine whether the country will continue its course of active support for Ukraine and what approaches to budget discipline it will choose.
German society found itself at a crossroads: how to combine the desire to support Ukraine and strengthen its own defense without threatening economic stability? Poll showed, that two-thirds of Germans support providing military aid to Ukraine. Of these, 27% want increased aid, 40% believe support should remain at current levels, and 27% want a reduction in arms supplies.
Support for military aid to Ukraine varies by region and political preferences. In the west of Germany, 70% of respondents support the supply of arms, while in the east this figure is only 53%. Supporters of the “Greens” especially approve of an increase in arms supplies to Ukraine, while supporters of the “Alternative for Germany” and the Sara Wagenknecht Alliance are more likely to advocate a decrease in military aid.
Of course, the growth of Germany’s public debt, which reached 1.69 trillion euros, bothers citizens Many fear that the increase in debt to finance defense and support of Ukraine could negatively affect the economy and social programs.
Germany’s public debt: an engine of growth or a threat to financial stability
An increase in Germany’s public debt is a double-edged sword that can both strengthen the economy and harm it. Imagine a powerful engine receiving extra fuel. Additional government spending can stimulate economic growth, especially if the funds are directed to infrastructure projects and supporting key industries. However, an increase in borrowing can bring to rising German bond yields (Bunds), which will affect global bond markets. In particular, an increase in the real yields of Bunds and a possible repositioning of the markets are expected.
But what happens when the initial momentum wears off? A constant increase in debt can threaten the country’s financial stability, especially if economic growth does not keep pace with debt growth. On the other hand, loosening the “debt brake” may allow Germany invest in infrastructure modernization and other critically important areas, which will contribute to long-term economic growth.
Should we be afraid of inflation? Although it is traditionally believed that increased public spending can lead to inflation, studies show that in Germany, rising public debt is not always accompanied by rising prices. However, as noted European Analytical Journal, increased government borrowing may raise interest rates as the government competes with the private sector for financial resources. This can lead to crowding out private investment.
Some economists consider, that Germany has sufficient fiscal space to increase its debt, especially to finance investments that will stimulate economic growth. However, they emphasize the importance of effective use of the funds raised.
Alternative financing options and legal aspects of suspending the “debt brake”
This year, Berlin is planning pass 6,000 high-tech HX-2 strike drones equipped with AI to Kyiv. These drones have a flight range four times greater and are resistant to radio-electronic warfare, which will significantly strengthen the capabilities of the Armed Forces.
The financing of the project is provided by additional aid in the amount of three billion euros, which is supported by the Minister of Foreign Affairs, Annalena Burbok, and the Minister of Defense, Boris Pistorius.
Military-industrial cooperation is actively developing. The German company KMW and the Ukrainian defense enterprise created a joint venture for maintenance and repair of military equipment for Ukraine.
Looking for ways to finance rising defense spending, Germany faces a dilemma: how to ensure the country’s security without sacrificing social programs?
Among other things, the German government considers the possibility of including the costs of transport infrastructure for the military in the defense budget. This will help meet NATO’s defense target of 2% of GDP without significantly increasing overall spending. However, critics believe that this does not solve the main problems of the country’s defense.
Chancellor Scholz rejected proposals to increase the defense budget to 5% of GDP. He noted that this would require raising taxes or cutting funding for important social programs.
To stop the “debt brake” it is necessary to make changes to the German Constitution. It is a complex political process that requires coordinated work of both houses of parliament: the Bundestag and the Bundesrat.
A proposal to amend the constitution can come from members of the Bundestag, the Bundesrat or the federal government. The draft law is considered in the Bundestag, where it must be supported by two-thirds of the deputies. After that, the document is sent to the Bundestag, which also requires the support of two-thirds of the representatives of the states. The Bundesrat has the right to veto any constitutional changes.
Clearly, the requirement of a two-thirds vote in both houses creates a barrier to change, providing protection against hasty decisions. These mechanisms guarantee that changes to the Basic Law take place only in the presence of a broad consensus and do not violate the fundamental principles of the state.
Fiscal restrictions in the eurozone countries and their willingness to remove them for the sake of helping Ukraine
In the eurozone, there are rules similar to the German “debt brake” that limit the level of public debt and the budget deficit. They support financial stability and prevent the accumulation of debts.
Thus, in 2012, France adopted the Law on Fiscal Responsibility, according to which the deficit should not exceed 0.5% of GDP. In 2011, Spain changed its constitution, limiting the budget deficit to 0.4% of GDP. This rule came into force in 2020. In 2012, Italy introduced a provision in the constitution obliging the government to have a balanced budget in accordance with the EU’s fiscal compact. The deficit should not exceed 0.5% of GDP.
A year ago, the Council of the EU and the European Parliament agreed to create a special support instrument – Ukraine Facility, with a budget of 50 billion euros for 2024-2027. This mechanism is aimed at restoring and modernizing Ukraine and supporting its reforms on the way to EU membership. Ukraine Facility provides financial support in the form of grants and loans, attracting private investment through guarantees and blended financing, as well as financing aid and development programs at various levels of government and civil society.
Germany’s proposal to suspend the “debt brake” to increase defense spending caused resonance in the Eurozone, in particular in France and Poland.
Yes, French President Emmanuel Macron announced about the intention to double the country’s defense budget. In addition, the lower house of the French Parliament supported increasing defense spending by 413 billion euros for 2024-2030, which shows the country’s serious intentions to strengthen its defense capabilities. Poland also supports the increase in defense spending.
The defense ministers of Germany, France, Great Britain, Italy and Poland, known as the E5 group, urged EU to increase defense spending and standardize industry in face of Russian threat.
An increase in Germany’s defense budget could help strengthen general security of Europe. An increase in defense spending to at least 2% of GDP, as stated in a joint article by the defense ministers of Germany, France and Poland, is a necessary condition for strengthening collective defense.
Tetyana Viktorova
