by Holger Schmieding*
Germany needs to take major decisions on migration and fiscal policy soon. Together, the center-right and center-left in Germany could change the constitution to harden the rules on unwarranted asylum claims, and thereby make the debt brake fit for purpose.
Such a great compromise could make sense under some conditions. Both sides would have to move away from long-held positions. However, it seems far more likely that they will merely agree on much smaller steps, notably a somewhat tougher stance against irregular immigration.
The backdrop: Germany works by consensus
All groundbreaking decisions in the last few decades have been taken by a broad agreement between the government and the mainstream opposition of the time. Examples include the “Agenda 2010” reforms of 2003-2005 that turned Germany from the “sick man of Europe” into the growth engine of the continent for the 15 years thereafter.
It also includes the gradual increase of the retirement age to 67 years (2007), the constitutional brake on public debt (2009), the fateful post-Fukushima exit from nuclear energy (2011) as well as the decisions to de facto underwrite large parts of Greek public debt (2010-2015) and to ramp up defence spending after Putin invaded Ukraine (February 2022).
The penchant for consensus is partly a lesson of Germany’s chequered history. More importantly, it reflects the checks and balances of Germany’s federal system.
For the most weighty matters, the government of the day needs the support not just of its own majority in the Bundestag, but also of the Bundesrat — the chamber of Germany’s 16 state governments. In this upper house of parliament, the mainstream opposition can usually wield a veto, as it can do today.
Two big issues
Today, Germany faces two major issues that would require a consensus to be resolved in a satisfactory way.
First, Germany has to clamp down on uncontrolled immigration to stop the rise of radical political fringes, and to safeguard the broad acceptance of the controlled qualified immigration which the country needs.
Second, it may have to either reform or continue to de facto circumvent its constitutional debt brake to raise spending on defense, infrastructure, economic resilience and decarbonization sufficiently.
Both issues are thorny. The center-left parties (SPD and Greens) usually shy away from serious measures against uncontrolled immigration, but would happily spend more money.
The post-Merkel center-right (CDU/CSU and the small liberal FDP) now advocate a much harder line against uncontrolled immigration while wanting to uphold the debt brake despite a need to spend more on many new priorities.
In principle, this could pave the way for a great compromise, with the center-left agreeing to a major overhaul of immigration policy if the center-right supports a reformed debt brake to allow some extra spending for narrowly defined specific purposes.
Fiscal straitjacket
The debt brake forces states and municipalities to balance their books, and restricts the federal deficit to 0.35% of GDP (€16 billion) in cyclically-adjusted terms.
Having been suspended in the wake of the pandemic and the energy crisis of 2022 with the help of an emergency clause (and de facto circumvented with a fudge in 2023), the debt brake is supposed to fully kick in again next year.
Many economists, and especially the FDP, understandably argue that the brake is needed to enforce fiscal discipline. More expenditure for new priority areas should be financed by restraining spending elsewhere. While this makes economic sense, it seems almost impossible politically.
Like the current government of SPD, Greens and the FDP, any conceivable government in Berlin would need to be a coalition between center-right and center-left parties, possibly in the form of a CDU/CSU-Green coalition after the next election in autumn 2025.
Short of a miraculous shift in political sentiment, a mere center-right coalition of CDU/CSU-FDP (currently around 35% in the polls) will remain miles away from a majority. Any new government would thus include a center-left party strongly opposed to major cuts even in those areas of social spending where the Bundesrat would not have a veto.
The choice for Germany is thus clear: It will either have to make the debt brake less restrictive, one way or the other – or it may fail to raise public spending on new priorities sufficiently and sustainably enough to modernize its government, its economy and its military all at the same time.
Having the strongest fiscal position of all major advanced economies by a wide margin, Germany could afford it within limits.
The fiscal issues could come to a head soon. On November 15, Germany’s constitutional court will rule on the transfer of €60 billion from a no longer needed COVID 19 off-budget fund to raise the spending power of a “climate and transformation” fund. If the court were to rule against the transfer, the government’s fiscal plans would be in disarray.
While the CDU/CSU may celebrate that as a success, it could not realistically claim that the books could be balanced without major cuts in expenditures which even the CDU/CSU would like to preserve.
Time to act
The need to act has dawned on policymakers on both sides of the political spectrum. After the rise of the anti-immigration ultra right AfD in state elections on October 8 to 14.6% in Bavaria and 18.4% in Hesse, Chancellor Olaf Scholz (SPD), and some leaders of the Greens (including economics minister Robert Habeck), have shifted to less welcoming positions on irregular immigration.
And, at least, in the CDU/CSU with its strong roots on the municipal and state level, the insistence on a strict interpretation of the debt brake seems less iron-clad than before.
Following a first meeting on October 13 between Scholz and CDU/CSU leader Friedrich Merz to discuss a “Deutschlandpakt” to modernize the country, the two will meet again to discuss migration policy.
A summit with state prime ministers on November 6 could be another step on the way. Harsher migration controls should ideally show some results ahead of the European elections on June 9 when fringe parties such as the AfD (or the new “Sahra Wagenknecht alliance”) are expected to do well.
Ideally, fiscal decisions ought to be taken by early December in the wake of the court decision, and in time for the 2024 budget. As a result, the coming weeks would be a good time to forge a great compromise.
The clearest solution would be to forgo further fudges, and to change the constitution with the required two-thirds majority in both houses of parliament. Article 16a (right to asylum) could be amended to allow parliament to pass more restrictive rules.
The debt brake (Articles 109 and 115) could be made less restrictive by excluding a limited amount of federal spending on military hardware or transport and energy infrastructure from the calculation for the federal deficit limit of 0.35% of GDP.
The €100 billion defense fund agreed by a broad parliamentary majority in 2022 in response to Putin’s invasion of Ukraine has set a precedent for such a change to the constitution.
A great compromise or incremental change only?
Is such a great compromise between the center-left and the center-right possible? It would be in keeping with the German tradition of consensus. It could deprive the political extremes of a major source of support. But, it would face serious resistance within all mainstream parties that would have to sign up to it.
It would be particularly hard to swallow for the Greens (hard clampdown on irregular immigration) and the FDP (debt brake reform). As a result, it still seems rather unlikely.
More likely, the mainstream parties will agree merely to modest reforms in the next few weeks, well below the threshold of constitutional change.
The focus will be on migration. Less generous welfare benefits for asylum seekers, streamlined procedures for processing asylum claims and deporting those whose application for asylum has been rejected are probably on the cards.
And, on the fiscal side, the government may have to resort to more dubious fudges to de facto circumvent the debt brake.
*Chief Economist of Berenberg Bank
**first published in: Theglobalist.com
By: N. Peter Kramer
