Angela Merkel once described the temptation to take on debt as a “sweet poison”. For the opposition Greens, the reverse is true: it is a potential cure for Germany’s ills.
The Greens, polling at about 20 per cent with three months to go until federal elections, said that to modernise Germany and make it carbon neutral in 20 years, public investments must rise €50bn a year over the next decade.
To achieve that, they want to overhaul the “debt brake”, the tight restriction on new borrowing inscribed into the German constitution in 2009 during the financial crisis.
“The pandemic really exposed all the deficits that we have in this country — particularly in digitisation and public administration,” said Lisa Paus, Green spokesperson on financial policy. “That’s a result of the debt brake. And that’s why after corona[virus] we can’t go back to the old rules we had before.”
Even before the pandemic, Germans were fretting about the state of their infrastructure. State development bank KfW puts the country’s investment gap — the money municipalities urgently needed to fix dilapidated bridges, schools and swimming pools — at €149bn.
Then coronavirus threw Germany’s deficiencies into even sharper relief. People were shocked to discover their public health offices still communicated by fax. They were furious at the slow pace of vaccinations and the bureaucracy involved in getting an appointment.
The Greens have what they say is a simple solution to the investment gap: they want to restrict Germany’s debt brake to consumption spending, when the government acquires goods and services for current use, but exempt investment spending from the rule. Here, the party said, some new borrowing should be allowed for expenditure that creates new public assets.
The idea is that years of under-investment have led to a different kind of debt — “debts that aren’t on the books but which endanger our prosperity”, as the Greens’ manifesto puts it. Kicking the can down the road, especially when it comes to the climate, will, they argued, only lead to far higher costs, and more debt, in the future.
Polls show that a large proportion of voters like the idea of higher state investments. It is also backed by some of Germany’s leading economists. “It’s not like they came up with this novel idea,” said Marcel Fratzscher, head of the German Institute for Economic Research in Berlin. “There’s a broad consensus that an investment drive like this is needed.”
Others were sceptical. “The Greens’ plans are predicated on the idea that zero interest rates will persist,” said Andreas Meyer-Schwickerath, Germany head of the economic think-tank OMFIF. “But what happens if they rise by 1-2 per cent? You end up in a debt trap.”
The rule the Greens want to reform, which limits new borrowing to 0.35 per cent of gross domestic product, has actually been in abeyance for months. Finance minister Olaf Scholz suspended it as soon as the coronavirus crisis set in, a move that allowed him to raise a record €370bn of pandemic-related debt since 2020. Scholz recently announced he would borrow an additional €100bn in 2022.
Scholz, the left-of-centre Social Democrats’ candidate for chancellor, wants to restore the debt brake in 2023, not 2022 as originally planned, but has rejected calls to do away with it altogether.
In an interview with the Financial Times last month, he said the Greens were being disingenuous because they knew there was no parliamentary majority for amending the constitution. Armin Laschet, the centre-right CDU’s candidate for chancellor, is also opposed to any changes.
Paus, a trained economist, acknowledged that it would be a challenge to drop the debt brake from the constitution. “If that won’t work,” she said, “then we have to consider other options — maybe organising the investments via the KfW [or] creating a federal investment fund, backing it with equity capital, and letting it raise debt.”
But that could only happen if the EU’s fiscal rules were loosened. This, too, is a Green objective. “If the rules are too tight, and lack economic sense, and prevent us doing what is politically necessary, they must be changed,” Greens co-leader Robert Habeck wrote in January.
The fiscal rules enshrined in the EU’s Stability and Growth Pact were in any case relaxed during the pandemic. But conservatives in the EU insist that the basic framework of the SGP, which limits debt to 60 per cent of GDP and budget deficits to 3 per cent, cannot be changed.
Paus said that at a time when the average debt-to-GDP ratio in Europe is 90-100 per cent, there is a clear need for reform. “There’s no point being dogmatic about it and just sticking with 3 and 60 per cent,” she said.
The Greens’ reforming zeal does not stop there. They also have big plans for the EU’s €750bn coronavirus recovery fund, set up last year to help member states deal with the economic consequences of the pandemic.
The fund is controversial in Germany. Angela Merkel was only able to sell the idea of the EU raising common debt to her fellow Christian Democrats by assuring them it was a one-off. The Greens, in contrast, want to turn the fund into a “permanent investment and stabilisation instrument” able to invest in “important future-oriented sectors” of the economy.
Whether they will be able to implement any of their ideas is yet to be settled. If the election produces a Christian Democrat-Green coalition, as many expect, conservative resistance to the Greens’ reform plans will be fierce.
But Paus said the voting public was on their side and support for more generous investments was growing. “People in this country want a functioning state,” she said. “And they’re frankly embarrassed by how far behind Germany is.”