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German coalition strikes breakthrough budget deal after crisis

AFP
AFP - [email protected]
German coalition strikes breakthrough budget deal after crisis
German Finance Minister Christian Lindner, German Chancellor Olaf Scholz and German Minister of Economics and Climate Protection Robert Habeck pose as they arrive to deliver a press conference on July 5, 2024 in Berlin, after the three parties in Germany's ruling coalition struck an agreement on the 2025 budget. Photo by RALF HIRSCHBERGER /AFP

The three parties in Germany's ruling coalition struck an agreement Friday on the 2025 budget after weeks of tough talks that pushed Chancellor Olaf Scholz's government to the brink of collapse.

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Scholz's centre-left Social Democrats and their partners, the Greens and the pro-business FDP, reached a deal after a final round of haggling that started Thursday, a source close to the coalition said.

The government has faced repeated rows since taking office in 2021 but analysts feared the budget crisis, with supporters of austerity clashing with those wanting more spending, could have been the final straw.

There was relief among coalition lawmakers that the coalition had weathered the crisis intact.

"I think it would have been completely irresponsible in view of the world situation if the government had fallen apart now," said Anton Hofreiter, a Green party lawmaker and chairman of the German parliament's European affairs committee.

Germany has a "great responsibility" towards Europe, he added.

Scholz's already fractious coalition came under increased pressure after the governing parties took a hit in European Parliament elections last month, and the tense negotiations drove speculation that the budget represented a make-or-break moment.

Central to the budget row were demands from Finance Minister Christian Lindner, a fiscal hawk from the FDP, of close to €30 billion in savings - a proposal baulked at by the Greens and SPD.

'Debt rules row'

Particularly contentious was Lindner's call to make savings on benefits spending.

READ ALSO: Why a push for tougher benefit sanctions in Germany is sparking a dispute

Lindner believed the payouts were too expensive and did not provide enough of an incentive to get people to return to work.

But the SPD was unhappy with his stance, as improving benefits was central to the party's 2021 election campaign as they sought to win back support of lower-income voters.

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Details of the deal struck Friday were not immediately disclosed.

But sources said it included an agreement to ensure the constitutionally enshrined "debt brake", a self-imposed cap on annual borrowing, was stuck to.

The debt brake had become a key point in talks. It was suspended for several years during the coronavirus pandemic and energy shock trigged by the Ukraine war but Lindner was keen to see it reinstated.

Debate over the rules became more heated after the country's top court ruled in November that the coalition had contravened them.

The constitutional court in Karlsruhe found that the government had broken the rule by trying to move money around special funds outside the main budget.

READ ALSO: Schuldenbremse - what is Germany's debt brake and how does it affect residents?

The court's decision led to greater spending constraints in the 2025 budget and prompted calls for the rules to be dropped or loosened to make high-priority investments in the armed forces in the face of a growing threat from Russia and decarbonisation.

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However Lindner ultimately prevailed in the row over the debt brake.

German media also reported that the defence ministry got a far smaller increase in its budget than it had sought, despite government plans to modernise the military following Russia's invasion of Ukraine.

The budget agreement was struck against a gloomy economic backdrop, as Germany's growth has stagnated due to high inflation and a manufacturing slowdown.

Next year's budget was initially slated to be approved by the cabinet on Wednesday, but now looks more likely to get full ministerial approval on July 17th after the details are ironed out.

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