Pandemic, climate change worsen Germany's financial outlook

One of the first official acts by new German Finance Minister Christian Lindner was something of a turnaround. Five days after being sworn into the post, Lindner — the chairman of the neoliberal Free Democrats (FDP) — introduced a supplementary budget bill in parliament that only months before, when still in opposition, he would have castigated as completely unsound. Now, he proposed to transfer what is left over in pandemic loans in 2021 to go toward investment into climate protection.

A total of €240 billion ($270 billion) in credit had been approved for hardship loans, and about €60 billion are left over, which Lindner wants to move to the Energy and Climate Fund. This money is to help with "the transformation of one of the largest industrialized nations toward climate neutrality," finance minister said in the Bundestag, referring once again to the declared goal of the new coalition government of center-left Social Democrats (SPD), Greens and FDP.

The plan has not go down well with everyone.

It is "fundamentally problematic to create financial reserves by taking out debt and then use these funds to finance projects in the coming years," according to the German Taxpayers Federation. The conservative Christian Democrats (CDU) and Christian Social Union (CSU), who are now in opposition, are outraged.

"I consider this supplementary budget to be unconstitutional," said Christian Haase, the budget policy spokesman for the CDU/CSU parliamentary group in the Bundestag.

The reallocation of funds, he said, was nothing more than a circumvention of the debt rules enshrined in the Basic Law, Germany's constitution. "I consider this supplementary budget to be the beginning of the end of the constitutional debt brake."

The curse of compromise

The finance minister finds himself in an awkward situation: For years, he has been pushing for Germany to reinstate the debt brake enshrined in the constitution. It stipulates that the state may only spend as much money as it takes in — except for a small credit line to cover emergency spending.

Because of the coronavirus pandemic, which qualifies as a major emergency, the debt brake has been suspended. Now, the new finance minister assures us, it will be respected again no later than 2023. But is that realistic? Lindner is facing the constraints posed by a governing coalition that will need an enormous amount of money in the coming years to deal with the consequences of the pandemic — and must urgently allocate funds to deal with the climate crisis, as well.

Budget without wiggle room

Lindner has to find money that he doesn't have. Germany's federal budget is generally inflexible. Every second euro is earmarked for social benefits, the lion's share of which are pension payments. Cuts are not possible, as the aging society is actually increasing the overall demand. The fallout of the COVID pandemic is also driving up social spending. In the coalition negotiations, the FDP ensured that there would be no tax hikes. But this leaves new borrowing as the only option.

Since the start of the pandemic, Germany has taken on considerably more debt. From 2014 to 2019 all federal budgets were balanced, but then in 2020 and 2021 there were record levels of borrowing. The government's mountain of debt grew by around €400 billion in the two years to a total of well over €1.4 trillion. If the debts of Germany's 16 states and its smaller local authorities are combined, the total comes to just under €2.4 trillion.

It was originally agreed that pandemic-related debts are to be repaid within the next 20 years. But in the coalition negotiations agreed to by the three parties extend debt repayment by another 16 to 36 years.

New budget, new debt

In 2022, the federal government will continue borrowing. Under the previous government under Chancellor Angela Merkel, in which new Chancellor Olaf Scholz was finance minister, almost €100 billion in new debts were earmarked for 2022. However, this was only within the framework of a draft budget that never became law. This is standard practice in years when there is a general election; it is then up to the new government either to revise the old draft or to draw up a completely new one.

The question is: How much debt will be taken on for 2022? In recent weeks, economic forecasts have been lowered further and further in the face of the fourth wave of the pandemic. Now the fifth wave, triggered by the Omicron variant of the virus, is rolling in and will predictably put a further dampener on the German economy: It will reduce tax revenues and again increase the need for government financial aid.

Another rise in unemployment

The hardship assistance for ailing companies was supposed to expire at the end of 2021. Now it has been extended by half a year. According to the Federal Ministry of Finance, almost €58 billion have been paid out to companies in the form of non-repayable grants (as of November 2021). The repayable aid, which includes loans, guarantees and state equity investments, amounts to just under €70 billion.

In 2022, companies will have to start repaying. But how is that supposed to work when the pandemic will affect business well into next year? It is to be expected that many repayments will not be made, plus new applications will be filed also for furlough and reduced-hours contract unemployment benefits. Catering, entertainment and tourism sectors have already announced layoffs.

Boosting the national economy

Pandemic management is just one area of urgency. The transformation of the economy toward climate neutrality needs to start as soon as possible. "Due to the uncertainties and restrictions in the COVID crisis, many investments in modernizing the economy have been canceled," Lindner said.

He wants to use the €60 billion in the new supplementary budget to boost the national economy. "It is essential to start catching up now. We must lose no more time in the transformation of the economy and society because of the pandemic." Lindner expects this to generate more economic growth and thus more tax revenue.

The end of austerity in EU?

It will also be interesting to see how the new finance minister positions himself in EU fiscal policy. Before this year's federal election, Lindner was seen as a fearmonger, especially in southern EU countries, because he wanted to advocate a tough consolidation course.

Now his national supplementary budget of €60 billion has triggered quite different expectations.

This became apparent during Lindner's inaugural visit to Paris, when his French counterpart, Bruno le Maire, expressly congratulated him on his move. It was also noted with approval in France and some southern European EU countries that the new chancellor, Scholz, and his Vice Chancellor Robert Habeck (Greens) are both warning against austerity within the EU.

Until now, the European Stability Pact has only allowed member countries' debt levels of 60% of their gross domestic product (the sum of all economic output).

Many countries failed to adhere to this restriction — in some cases significantly so.

In 2019, Germany was below 60% for the first time since 2002. In 2020, it reached over 68% again. And the trend is going up.

This article has been translated from German.

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