What is Germany's debt brake? (original) (raw)

In Germany, the federal government and the 16 states are obliged to balance their books and are practically prohibited from taking out extra loans. No other G7 country has such strict limits on new borrowing. The rules are enshrined in the Basic Law, i.e. the German constitution, and apply — with minor differences — both at the federal level and in the 16 states (known as Länder).

German government announces special budget

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Article 109 of the Basic Law, paragraph 3, states: "The budgets of the Federation and the Länder shall, in principle, be balanced without revenue from credits." This means the state may only spend as much money as it takes in, primarily from taxes and levies. This requirement is known colloquially as the "debt brake."

Relieving future generations

The requirement was introduced in 2009 under then Chancellor Angela Merkel, a Christian Democrat (CDU), and her Finance Minister Peer Steinbrück, a Social Democrat (SPD). It was introduced in the middle of a global financial and economic crisis in which there was much discussion about national debt.

In a speech to state premiers at the time, Steinbrück spoke of a "decision of historic significance — a decision that should secure the state's financial capacity to act, particularly concerning intergenerational justice."

However, a controversial political debate surrounded the introduction. The Greens (then in opposition) and the socialist Left Party were strictly against it, arguing that the state was restricting its ability to act. Proponents of the debt brake, on the other hand, pointed out that the state would have to spend more and more money on interest as the debt mountain grew. This, they said, would become even more restrictive and burden generations of people.

Angela Merkel and her Finance Minister Peer Steinbrück introduced the debt brake in 2009Image: AP

Budgets balanced from 2014 to 2019

The debt brake became legally binding for the federal government in 2016 and for the states in 2020. However, in 2014, the then Federal Finance Minister Wolfgang Schäuble (CDU) was already able to present a balanced budget for the first time in 45 years. The term "black zero" was coined to mark Schäuble's achievement and became a political slogan, because expenditure and income balanced each other out.

However, the debt brake is not absolute, at least not for the federal government. While an outright ban on debt applies to the federal states, the federal government is permitted net borrowing amounting to a maximum of 0.35% of economic output. An example: Germany's gross domestic product amounted to around €3.88 trillion ($4.25 trillion) in 2022, meaning the federal government would have been allowed to take on around €13 billion in additional debt.

Coronavirus and Ukraine war

However, the government borrowed somewhere in the three-digit billion-euro range in 2022. That was because Germany's parliament, the Bundestag, voted to make use of an exception to the debt brake, as it had already done for 2020 and 2021: Referring to the consequences of the coronavirus pandemic and the war in Ukraine, parliament claimed an "extraordinary emergency situation."

The Basic Law allows the debt brake to be suspended "for natural disasters or unusual emergencies beyond governmental control and substantially harmful to the state's financial capacity." In the current debate on the 2024 budget, the governing SPD and the Greens are once again calling for an emergency situation to be declared due to the financial consequences of the war in Ukraine and the ensuing energy crisis.

A lobby group created a "debt clock" to display the accumulating debt in Germany (picture from 2021)Image: Daniel Kalker/dpa/picture alliance

Is the debt brake too strict?

Meanwhile, a debate has erupted on whether the debt brake should be reformed. Some economists are in favor, arguing that the rule hampers the state's ability to invest in infrastructure and future-oriented technologies.

However, any type of reform is unlikely in the short term because the Basic Law can only be amended with a two-thirds majority in the Bundestag. This majority does not currently exist because the conservative CDU and CSU, which together form the largest opposition parliamentary group, are against an amendment.

This article was first published on December 1, 2023, and has been updated with the latest developments on November 7, 2024.

This article was originally written in German.

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