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‘Germany must give Greece more help’

Less than a month before German elections, the eurozone crisis has entered the campaign battle, giving the opposition badly needed ammunition for an attack against Chancellor Angela Merkel who is riding high in the polls.

Published: 27 August 2013 14:45 CEST

Photo: DPA

An article in newspaper the Tagesspiegel on Monday argued that Greece must be given more help, either by writing off some of its debts or with a fresh bailout.

Commentator Harald Schumman argued: “The attempt to tame Greece’s debt by cutting the government budget has clearly failed.

“The Greek government has cut its budget by 24 percent since 2009. The economy has been so badly damaged that the debt burden – the ratio of debt to GDP – has increased to more than 160 percent.

“Changing tack is urgent. At the moment a third of the Greek population is living in poverty. The country doesn’t need more emergency credit but a proper programme of help which stimulates investment shifts perspectives.

“Investment will not come until the future of the euro is secure. Overcoming this insecurity must be the priority.”

BACK ON THE FRONT PAGE

Greece’s shaky finances and to what extent Germany is responsible for them, finally entered the election campaign last week when Finance Minister Wolfgang Schäuble admitted the country would need another rescue package from 2014, seen as marking a shift in Berlin’s position.

Opponents seized on the admission by Schäuble playing up the image of the poor German taxpayer working hard to pay once again for the Greeks.

“Schäuble confirms what everyone knew,” headlined the top-selling Bild daily, ever ready to defend the taxpayers of Europe’s largest economy and the biggest eurozone paymaster.

For the Social Democratic Party (SPD) and Green opposition, the confession by a Merkel loyalist was a godsend.

Much of Merkel’s huge popularity has been due to the perception in her country that she has managed the eurozone crisis prudently, looking after the German public purse.

For months she has enjoyed a personal poll lead of nearly 30 points over her Social Democratic rival Peer Steinbrück, who was her finance minister in a 2005-09 Grand Coalition government.

He accused the coalition government of Merkel’s conservatives and the Free Democrats of having “distributed sleeping pills and trying to hide the fact that stabilising the eurozone will have a cost”.

PLAYING DOWN THE COSTS

The conservatives have tried to extinguish the fire which Schäuble lit.

Schäuble insisted that the third European Union and International Monetary Fund programme of assistance for Athens would be “much smaller” than the previous two.

Greek Finance Minister Yannis Stournaras said on Sunday that if a third bailout was needed in 2014, it would be worth around €10 billion euros and would not be contingent upon new austerity measures.

Merkel, meanwhile, has said that Greece’s debt and structural reforms would again be studied in 2014, as planned.

“I will certainly not weaken the incentive for Greece to implement further necessary reforms by commenting now on the outcome of a programme that is set to run for another year,” she told the Tuesday edition of the Saarbrücker Zeitung.

Like Schäuble, she has insisted there will be no new ‘haircut’, warning that another Greek debt write-down could spark a “domino effect of uncertainty” and scare off investors in the eurozone.

DO GERMAN VOTERS CARE?

Despite the war of words, the effect on the polls has so far been limited in the election race, where the future of the eurozone has not figured prominently.

According to a poll published Sunday, the conservatives and their junior partners would get a total of 45 percent, against a combined 37 percent for the SPD and their preferred allies the Greens.

Lothar Probst, a political scientist at Bremen University warned that Greece “spells a certain risk for the conservative Merkel, because so far the Germans have felt their savings were secure.”

But Professor Michael Wohlgemuth, director of think-tank Open Europe Berlin, told The Local that even Schäuble’s comments would not make Greece and a potential bailout from German taxpayers a decisive campaign issue.

“The SPD have not got a solution either,” he said. “People may even think that the SPD would be more willing to spend more money on Greece.”

AFP/The Local/tsb

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Schuldenbremse: What is Germany's debt brake and how does it affect residents?

What is the debt brake and why did Germany introduce it?

Known as the Schuldenbremse in German, the debt brake is a cap on government borrowing that’s enshrined in Germany’s constitution. It states that the federal government can only take on a certain amount of new debt in each fiscal year.

This is capped at 0.35 percent of Gross Domestic Product (GDP) – the amount of money the country produces each year in goods and services. Though GDP varies from year to year, this generally gives the government enough wiggle room to borrow around €9 billion annually.

When it comes to spending on a regional level – i.e. by state governments in Germany – the rules are even stricter. States aren’t allowed to borrow any money to fund their plans and must therefore create balanced budgets that finance spending exclusively through tax income and money from the central government.

But why exactly has Germany decided to tie itself to such strict rules on spending? Well, there are quite a few answers to that.

Back in 2009, the Grand Coalition of the Christian Democratic Union (CDU) and Social Democrats (SPD), led by Angela Merkel, decided to bring the debt brake into law. At the time, the global economy was struggling to deal with the fallout of the 2008 financial crisis, and Germany was racking up a huge deficit.

The idea was to bring borrowing back under control as soon as possible and prevent leaving billions of euros in debt for future generations to pay off. It also paid homage to the main edicts of neo-liberalism, creating a streamlined state with little room for generous investments or high social welfare payments.

Thanks to the ongoing effects of the financial crisis, the debt break only came into force seven years after it was put in the constitution. This means that since 2016, the federal governments have been tied to 0.35 percent cap on borrowing.

That said, there are a few exceptions to the Schuldenbremse: in periods of national emergency, such as natural disasters or pandemics, the government is allowed to put the debt brake to one side. That’s exactly what happened during the Covid pandemic in the years 2020 to 2022, and now it appears it will be put aside for the fourth year in a row. In other words, it has been sidelined for exactly half of the time it has been in place.

Why has the debt brake been in the news recently?

The debt brake was put in the spotlight in early November when Germany’s Constitutional Court declared tens of billions of earmarked government spending to be ‘unconstitutional’.

The case related to €60 billion of borrowing that was originally intended for tackling the Covid crisis but had later been diverted towards a fund for fighting climate change known as the Climate and Transformation Fund.

In normal cases, moving unspent money around wouldn’t be a problem – but in this case, the specific rules around the debt brake came into play. Utilising the exceptions in the debt brake, the €60 billion was borrowed for the purpose of stabilising the economy during the pandemic – and as such it was only supposed to go towards tackling that emergency.

Wind turbines in Germany

Wind turbines in the northern German state of Schleswig-Holstein. Photo: picture alliance/dpa | Christian Charisius

Beyond this amount, which already represents a huge chunk of the national budget, the court decision also invalidated the Economic Stabilisation Fund (WSF). This fund was also originally set up during the Covid crisis and later repurposed as Olaf Scholz’s ‘Doppelwumms’: a €200 billion pot that paid for the energy price breaks and other relief measures in the wake of the Ukraine war.

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Finance Minister Christian Lindner (FDP) announced that the debt brake would be set aside for one more year to allow the government to meet its financial commitments for 2023. However, the budget for next year – and how the significant gaps in funding will be filled – still remain unclear.

The crisis has sparked a major debate among politicians about whether the debt brake is still fit for purpose.

What do critics of the debt brake say?

As you might expect, the tight controls on spending aren’t popular with everyone – especially those on the left on the political spectrum.

Proponents of the debt brake say we should lower the deficit to avoid lumbering future generations with unmanageable debts, but critics of the mechanism make the opposite argument. They say that straightjacketing spending will actually put a strain on future generations as the government will be unable to invest in modern infrastructure and could therefore be hindering growth.

If borrowing is slashed too much and tax revenues don’t increase, projects like the green transformation, upgrading public transport and pushing ahead with digitalisation will inevitably be put on the backburner. The government will be forced to prioritise its urgent day to day spending in the present rather than trying to invest in the future – and it could also be forced to cut vital public services.

Deutsche Bahn train

Deutsche Bahn staff give the sign for an ICE high speed train to leave the main railway station in Stuttgart, southern Germany, on August 11, 2021. Photo by THOMAS KIENZLE / AFP

Other critics argue that the debt brake was appropriate at the time when it was introduced but that times have changed and governments require more flexibility.

In the early to mid-2000s, Germany was riding high on a booming manufacturing and exports sector fuelled by cheap Russian gas, and had made little attempt to invest in renewable energy. Now, however, with Germany transitioning away from cheap Russian gas while trying to slash the country’s carbon emissions, Germany is faced with numerous expensive challenges at a time when the economy is especially weak – meaning borrowing more or raising more taxes feel like an inevitability.

Could the debt brake be reformed in the future?

That’s certainly an idea that’s come from multiple camps – not least Economics Minister Robert Habeck of the Green Party. Speaking at the recent Green Party Conference, Habeck slammed the current rules on borrowing, stating: “With the debt brake as it is, we have voluntarily tied our hands behind our backs and are going into a boxing match.”

According to Habeck, the debt brake should be reformed according to the “green golden rule” to allow borrowing for investments rather than everyday spending. This is an idea that has also been put forward by economists.

Saskia Esken, the co-leader of the SPD, has also spoken out in favour of a reform of the debt brake to avoid putting a drag on growth in the future.

However, the likelihood of this happening seems low at the moment, even if Greens and SPD politicians – and some members of the CDU – are in favour of it.

That’s because it takes a two-thirds majority in the Bundestag to change any aspect of the Grundgesetz, or constitution – a much higher bar than the simple majority needed to change a law.

The FDP, who are in the coalition alongside the Greens and SPD, are also fiercely opposed to any reform of the debt brake and want to rein in government spending instead.

Christian Lindner

German Finance Minister Christian Lindner (FDP) speaks in the Bundestag. Photo: picture alliance/dpa | Michael Kappeler

Messing with this fiscal rule could also prove unpopular: a recent poll found that 61 percent on Germans were opposed to any reform of the debt brake, as opposed to 35 percent who were in favour of it, and 4 percent who didn’t know.

It means that in the medium term at least, the government may have to take a scalpel to its previous spending plans, cutting spending on investment projects, public services like healthcare and transport and social welfare such as child and unemployment benefits. Or it may find a way to raise some taxes without upsetting the FDP.

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