Will debt-shy Germans vote to loosen the purse strings?

When Chancellor Angela Merkel's government smashed its debt taboo and opened the money taps to help the German economy weather the pandemic crisis, it vowed to return to fiscal rigour as soon as possible.

Will debt-shy Germans vote to loosen the purse strings?
Photo: picture alliance/dpa | Daniel Karmann

But as the post-Merkel era beckons, voters may have other ideas.

In the closing stretch before September 26th polls that will see Merkel bow out after 16 years, surveys show her CDU-CSU alliance trailing the centre-left Social Democrats (SPD).

Hoping to turn the tide, the conservatives have returned to their favoured attack lines.

The SPD’s candidate for the top job, Finance Minister Olaf Scholz, would be a “debt chancellor”, warned CSU leader Markus Söder.

Conservative millionaire Friedrich Merz, the CDU’s economic policy spokesperson, said taxpayers would end up footing the bill for an SPD-led government’s “free beer” policies.

Scholz himself has said he wants higher taxes for top earners and the reintroduction of a wealth tax to help fund much-needed investments in Europe’s biggest economy.

Whoever wins, any future German government will be presented with a “difficult choice” between “changing budgetary rules” to match the economic reality, or “sharply reducing the public deficit”, says Patrick Artus, chief economist at Natixis.

It will have a direct impact on people living in Germany, possibly affecting taxes, benefits and the course that the country takes in the coming years.

Both in public and private, Germans are known for taking pride in saving money and avoiding debt. 

But when it comes to the public purse, Germany’s cherished balanced finances have been turned upside down during the pandemic, with Merkel’s government taking on €370 billion ($438 billion) of new debt in 2020 and 2021.

Total public debt is expected to exceed 70 percent of gross domestic product (GDP) this year, up from 59.7 percent before the pandemic.


EU watching

Merkel’s Germany is well-known for its budgetary discipline – and at times for enforcing it on fellow Europeans – but the pandemic spending forced it to suspend the “debt brake” written into the constitution in 2009.

The rule forbids the government from borrowing more than 0.35 percent of its GDP, other than in “exceptional circumstances” approved by parliament.

Between January and March this year, the public deficit exceeded 80 billion euros, equivalent to 4.7 percent of GDP.

It’s a long way from Germany’s vaunted “black zero” budget – the shorthand name given to the achievement of balancing the books and a target the country
consistently met between 2014 and 2019.

OPINION: Germany will have to endure Covid for a while longer, but at least Merkel is going

The crisis also saw Merkel spearhead the European Union’s 800-billion-euro coronavirus recovery fund, which will be financed through joint borrowing for the first time — crossing a German red line on EU debt pooling.

But European member states watching the election and hoping for a transformation of German debt attitudes may be disappointed.

As a battle looms on whether to loosen the EU’s strict budget rules, Scholz ruled out any changes at a recent meeting of EU finance ministers.

The pandemic had shown that the bloc’s fiscal rules already had enough flexibility, he said.

‘Gigantic sums’

By Merkel’s own admission, Germany will have to “spend gigantic sums of money in the coming years”.

The country’s biggest challenges — energy transition, climate protection and digital infrastructure — mean that “40 to 50 billion euros of public investment a year, between 1 and 1.5 percent of GDP, will be needed for the next 10 years,” said Marcel Fratzscher president of the economics think-tank DIW.

To solve this budgetary equation, it will be necessary to “reform” the debt brake to reflect EU norms, which tolerate deficits of up to three percent of GDP, Fratzscher said.

The catch: any change to the debt rule would have to be approved by a two-thirds super majority in the German parliament.

 Another way

“The ruling parties will have to find another way to get around the rule,” Fratzscher said.

Much will depend on the balance of power between the parties in Germany’s next coalition.

Sticking to the debt brake will be “impossible without tax rises”, Fratzscher said – something the conservatives have ruled out.

The left-wing Greens, who fancy their chances of being part of the next government, want to adapt the debt brake to allow 50 billion euros of
borrowing for investment annually until 2030.

The SPD are open to more public spending, but within the limited scope allowed by the constitutional brake.

ANALYSIS: Who could be in Germany’s next coalition?

By Jean-Philippe LACOUR

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Germany’s ‘traffic light’ parties sign coalition agreement in Berlin

Two and a half months after the federal elections on September 26th, the three parties of the incoming 'traffic light' coalition - the SPD, Greens and FDP - have formally signed their coalition agreement at a public ceremony in Berlin.

Traffic light coalition
Germany's next Chancellor Olaf Scholz (front, left) on stage in Berlin with other members of the new coalition government, and their signed agreement. Photo: picture alliance/dpa | Michael Kappeler

The move marks the final stage of a 10-week week process that saw the three unlikely bedfellows forming a first-of-its-kind partnership in German federal government. 

The SPD’s Olaf Scholz is now due to be elected Chancellor of Germany on Wednesday and his newly finalised cabinet will be sworn in on the same day. This will mark the end of the 16-year Angela Merkel era following the veteran leader’s decision to retire from politics this year. 

Speaking at the ceremony in Berlin on Tuesday morning, Scholz declared it “a morning when we set out for a new government.”

He praised the speed at which the three parties had concluded their talks and said the fight against the Covid crisis would first require the full strength of the new coalition.

Green Party co-leader Robert Habeck, who is set to head up a newly formed environment and energy ministry, said the goal was “a government for the people of Germany”.

He stressed that the new government would face the joint challenge of bringing climate neutrality and prosperity together in Europe’s largest industrial nation and the world’s fourth largest economy.

Green Party leader Annalena Baerbock spoke of a coalition agreement “on the level of reality, on the level of social reality”.

FDP leader Christian Lindner, who managed to secure the coveted role of Finance Minister in the talks, declared that now was the “time for action”.

“We are not under any illusions,” he told people gathered at the ceremony. “These are great challenges we face.”

Scholz, Habeck and Lindner are scheduled to hold  a press conference before midday to answer questions on the goals of the new government.

‘New beginnings’

Together with the Greens and the FDP, Scholz’s SPD managed in a far shorter time than expected to forge a coalition that aspires to make Germany greener and fairer.

The Greens became the last of the three parties to agree on the contents of the 177-page coalition agreement an in internal vote on Monday, following approval from the SPD and FDP’s inner ranks over the weekend.

“I want the 20s to be a time of new beginnings,” Scholz told Die Zeit weekly, declaring an ambition to push forward “the biggest industrial modernisation which will be capable of stopping climate change caused by mankind”.

Putting equality rhetoric into practice, he unveiled the country’s first gender-balanced cabinet on Monday, with women in key security portfolios.

“That corresponds to the society we live in – half of the power belongs to women,” said Scholz, who describes himself as a “feminist”.

READ ALSO: Scholz names Germany’s first gender-equal cabinet

The centre-left’s return to power in Europe’s biggest economy could shift the balance on a continent still reeling from Brexit and with the other major player, France, heading into presidential elections in 2022.

But even before it took office, Scholz’s “traffic-light” coalition – named after the three parties’ colours – was already given a baptism of fire in the form of a fierce fourth wave of the coronavirus pandemic.

Balancing act
Dubbed “the discreet” by left-leaning daily TAZ, Scholz, 63, is often described as austere or robotic.
But he also has a reputation for being a meticulous workhorse.
An experienced hand in government, Scholz was labour minister in Merkel’s first coalition from 2007 to 2009 before taking over as vice chancellor and finance minister in 2015.
Yet his three-party-alliance is the first such mix at the federal level, as the FDP is not a natural partner for the SPD or the Greens.

Keeping the trio together will require a delicate balancing act taking into account the FDP’s business-friendly leanings, the SPD’s social equality instincts and the Greens’ demands for sustainability.

Under their coalition deal, the parties have agreed to secure Germany’s path to carbon neutrality, including through huge investments in sustainable energy.

They also aim to return to a constitutional no-new-debt rule – suspended during the pandemic – by 2023.

FDP cabinets
Volker Wissing (l-r), FDP General Secretary und designated Transport Minister, walks alongside Christian Lindner, FDP leader and designated Finance Minister, Bettina Stark-Watzinger (FDP), the incoming Education Minister, and Marco Buschmann, the incoming Justice Minister. Photo: picture alliance/dpa | Michael Kappeler


Incoming foreign minister Annalena Baerbock of the Greens has vowed to put human rights at the centre of German diplomacy.

She has signalled a more assertive stance towards authoritarian regimes like China and Russia after the commerce-driven pragmatism of Merkel’s 16 years in power.

Critics have accused Merkel of putting Germany’s export-dependent economy first in international dealings.

Nevertheless she is still so popular at home that she would probably have won a fifth term had she sought one.

The veteran politician is also widely admired abroad for her steady hand guiding Germany through a myriad of crises.