MNI INTERVIEW: Debt Brake Deal Possible After German Election
MNI (LONDON) - Germany’s likely upcoming fragile coalition has a chance of sealing a deal on reforming the country’s constitutional borrowing limit, a leading economist told MNI, calling the economic platforms of both major parties ahead of next month’s elections too unrealistic to survive negotiations to form a government.
Both Friedrich Merz's centre-right Christian Democratic Union (CDU) and Olaf Scholz's centre-left Social Democratic Party (SPD) have presented plans for income tax cuts that leave gaping holes in Germany’s public finances, said Jens Suedekum, an SPD member and a member of the Federal Ministry for Economic Affairs and Climate Action’s Scientific Advisory Board.
The party manifestos are a "disappointment, because nobody is really making an honest evaluation of the current situation and of the major problems Germany’s economic model faces more broadly,” said Suedekum, professor of International Economics at Heinrich-Heine-University, Duesseldorf. (See MNI INTERVIEW: German Economy "Stuck," Top Economist Says)
While the CDU is well ahead in polling for the Feb 23 vote, with around 30% support, it is unlikely to be able to form a government without the support of the SDP. This, while no easy process, particularly given the personal animosity between Merz and Scholz, might lead to a more realistic approach to the country’s economic challenges, including reform of the debt brake limiting the structural fiscal deficit to 0.35% of GDP, Suedekum said.
Leading CDU figures have already backtracked on their manifesto somewhat in interviews and public statements, he noted.
“Merz has indicated that once in government it would be necessary to check the state of the national finances, to turn over every stone, and if they then realise that Germany is facing a problem, then we can talk about reforming the debt brake. He has also signaled some openness to spending more on defence - maybe not by reforming the debt rate, but by using additional special purpose funds financed by debt,” Suedekum said.
REALITY TO BITE
“I think it’s likely that were coalition talks to take place the CDU would become much more open to debates about reforming the debt brake - while placing the political responsibility for doing so on their coalition partner. Until then, they will want to present themselves as the sole defenders of the debt brake.”
Current plans by the CDU would cost some EUR100 billion per year in lost tax revenue, roughly 25% of the Federal budget, Suedekum said, while cutting welfare and offering little by way of growth-focused public investments.
“How much annual GDP growth would you need to self-finance 100 billion euros of spending cuts? Roughly 10%, by my calculations. That is obviously totally absurd. It just doesn’t add up. Even if the programme were implemented over four years, to have tax cuts of around 25 billion euros you would need additional growth rates of at least 2%, and I simply don’t see that happening.”
The SDP - polling close to 16% - says it would allow limited debt brake reform under U.S.-Inflation-Reduction Act- inspired plans to offer tax credits for investment, but at a cost of around EUR20 billion. Tax breaks for lower and middle-income households would mean an added EUR10 billion loss not covered by top-level tax bracket and inheritance tax reform, Suedekum said.
VAGUE GREENS
The SDP’s current coalition partners the Greens - projected to gain some 14% of the vote - produced too short a manifesto to get a detailed idea of their plans, Suedekum said, but are in favour of tax credits for investment, inheritance tax reform and hiking income tax rates for top earners. The other members of the former, so-called “traffic-light coalition,” the liberal Free Democratic Party, are closer to the CDU in terms of free-market ideology but may not receive enough votes to win representation in parliament.
No party has set out serious plans to raise the retirement age, or to address tensions with the U.S. and China, “which would require major investment to turn the economic model of Germany upside down,” Suedekum said.
With the hard-right Alternative fuer Deutschland (AfD) polling around 21%, the consequences of Germany’s next government proving as dysfunctional as the last could be significant, Suedekum said.
“That would be a disaster, because then, looking ahead to the next election in 2029, there's almost no other scenario than the AfD coming in first.”