fratzscher18_ODD ANDERSENAFP via Getty Images_germany debt brake ODD ANDERSEN/AFP via Getty Images

Germany’s Debt Brake Is Breaking Its Economy

The recent decision by the German Constitutional Court to block the government’s plan to redirect €60 billion in unused pandemic funds toward climate-related projects has underscored the growing divisions within Germany’s three-party ruling coalition. Moreover, the decision is set to undermine economic growth at a critical moment.

BERLIN – Earlier this month, Germany’s Constitutional Court ruled that the government’s plan to redirect unused COVID-19 aid funds toward combating climate change violated the so-called debt brake. The decision is not just a setback for Chancellor Olaf Scholz; it could also deepen the ideological divisions within the coalition government and undermine the country’s fiscal policy, thereby posing a grave threat to its economic outlook.

Germany introduced the debt brake into its constitution in 2009, imposing limits that were far more rigid than those required by the European Union’s Stability and Growth Pact. The brake largely prohibits the federal and state governments from taking on new debt; exceptions are allowed only in extreme emergencies. The federal government used this emergency exemption in 2020 to allocate more than €200 billion in special funds to mitigate the pandemic’s economic impact.

Scholz’s government tried to use the same exemption to channel €60 billion ($66 billion), or 1.5% of GDP, from these special funds toward industrial subsidies and climate-related initiatives. The opposition Christian Democratic Union then appealed to the Court, which blocked the government’s plan on the grounds that it did not meet the “constitutional requirements for emergency borrowing.” Ironically, it was the CDU, under the leadership of former Chancellor Angela Merkel, that established this special fund.