Germany, Europe’s largest economy and a key player in global affairs, is facing a severe fiscal crisis that threatens to undermine its social and environmental goals. The German government has adopted plans to cut its budget for next year by €30.6 billion, affecting areas from health to childcare and public transport. The cuts are the result of a combination of factors, including the coronavirus pandemic, the energy crisis, the war in Ukraine, and the constitutional debt brake. The budget cuts have sparked fierce political battles within the governing coalition and across the political divide, as well as criticism from labor unions and civil society groups.
The impact of the coronavirus pandemic
The coronavirus pandemic has hit Germany hard, both in terms of public health and economic performance. The country has recorded over 5 million cases and over 100,000 deaths since the outbreak of the virus in early 2020. The government has imposed several lockdowns and restrictions to contain the spread of the virus, which have had a negative impact on economic activity and consumer confidence. The government has also launched a massive fiscal stimulus package to support businesses, workers, and households affected by the pandemic. The package included direct payments, tax relief, wage subsidies, loans, and grants. The total cost of the stimulus package amounted to about €750 billion, or 22% of GDP, making it one of the largest in the world. ¹
The fiscal stimulus package helped Germany to weather the crisis comparatively well, as the economy contracted by 4.9% in 2020, less than the eurozone average of 6.6%. However, the recovery has been slow and uneven, as the country faced a second wave of infections in late 2020 and a third wave in early 2021. The economy grew by only 0.1% in the first quarter of 2021, and contracted by 1.8% in the second quarter, entering a technical recession. The outlook for the rest of the year remains uncertain, as the country faces the challenges of vaccinating its population, reopening its economy, and dealing with the new variants of the virus. The government expects the economy to grow by 3.5% in 2021, and by 3.6% in 2022, but these projections are subject to significant downside risks. ²³
The impact of the energy crisis
Another factor that has contributed to the fiscal crisis in Germany is the energy crisis that has gripped Europe and the world since late 2021. The energy crisis was triggered by a combination of factors, including the surge in demand for natural gas and electricity as the global economy recovered from the pandemic, the low levels of gas storage and production in Europe, the reduced supply of gas from Russia due to the war in Ukraine, the disruption of renewable energy sources due to unfavorable weather conditions, and the phasing out of nuclear and coal power plants in Germany and other countries. The energy crisis has led to a sharp increase in energy prices, which have reached record highs in recent months. The average price of electricity in Germany was €0.38 per kilowatt-hour in September 2021, up from €0.29 in September 2020. The average price of natural gas in Germany was €1.77 per cubic meter in September 2021, up from €0.42 in September 2020. ⁴
The energy crisis has had a negative impact on the German economy and society, as it has increased the costs of production and consumption, reduced the competitiveness of German exports, and eroded the purchasing power of households. The energy crisis has also posed a challenge for the German government, as it has increased the public spending on energy subsidies and social transfers, and reduced the tax revenue from energy consumption. The government has allocated €11 billion to compensate households and businesses for the higher energy bills in 2021 and 2022. The government has also pledged to increase the supply of renewable energy, diversify the sources of gas imports, and improve the energy efficiency of buildings and appliances. However, these measures will take time to implement and will require additional investment and coordination.
The impact of the war in Ukraine
A third factor that has contributed to the fiscal crisis in Germany is the war in Ukraine, which erupted in November 2021, when Russia invaded and annexed the eastern regions of Donetsk and Luhansk, following a failed attempt to mediate a political solution to the conflict that had been simmering since 2014. The war in Ukraine has escalated into a major security and humanitarian crisis, as it has involved the use of heavy weapons, cyberattacks, and chemical weapons, and has resulted in thousands of casualties, millions of displaced people, and widespread damage to infrastructure and the environment. The war in Ukraine has also triggered a diplomatic and economic confrontation between Russia and the West, as the latter has imposed sanctions on Russia and its allies, and suspended the Nord Stream 2 pipeline project, which was supposed to deliver gas from Russia to Germany and other European countries.
The war in Ukraine has had a negative impact on the German economy and society, as it has disrupted the trade and investment relations with Russia, increased the geopolitical uncertainty and instability in the region, and raised the security and defense costs for Germany and its NATO allies. The war in Ukraine has also posed a challenge for the German government, as it has tested its leadership and solidarity within the European Union and the transatlantic alliance, and its commitment to the principles of international law and human rights. The government has condemned the Russian aggression and supported the Ukrainian sovereignty and territorial integrity. The government has also provided humanitarian and financial assistance to Ukraine, and increased its defense spending and military presence in the region. However, these measures have been criticized by some as insufficient and ineffective, and by others as provocative and escalatory.
The impact of the debt brake
A fourth factor that has contributed to the fiscal crisis in Germany is the debt brake, which is a constitutional rule that limits the federal government’s net borrowing to 0.35% of GDP in normal times, and allows for higher borrowing only in exceptional circumstances, such as natural disasters or severe recessions. The debt brake was introduced in 2009, in the aftermath of the global financial crisis, as a way to ensure fiscal discipline and sustainability, and to comply with the European fiscal rules. The debt brake has been praised by some as a successful model of prudent and responsible fiscal policy, and as a source of credibility and stability for Germany and the eurozone. The debt brake has also been criticized by others as a rigid and arbitrary constraint, and as a source of underinvestment and austerity for Germany and the eurozone.
The debt brake has had a significant impact on the German fiscal policy, as it has forced the government to balance its budget and reduce its debt in the past decade, and to suspend the rule and increase its borrowing in the past two years to cope with the pandemic. The debt brake has also shaped the government’s plans for the next year and the medium term, as it has obliged the government to cut its budget for 2022 by €30.6 billion, and to return to the rule by 2023, with a maximum net borrowing of €16.6 billion. The government has defended its adherence to the debt brake, arguing that it is necessary to maintain fiscal credibility and sustainability, and to avoid passing on the debt burden to future generations. The government has also argued that it is possible to achieve its social and environmental goals within the limits of the debt brake, by prioritizing and reallocating its spending, and by mobilizing other sources of financing, such as the European recovery fund and the private sector.
The political implications of the budget cuts
The budget cuts for 2022 have sparked fierce political battles within the governing coalition and across the political divide, as different parties and groups have clashed over the size, scope, and distribution of the cuts, and over the alternatives and priorities for the fiscal policy. The governing coalition, composed of the Social Democrats (SPD), the Greens, and the Free Democrats (FDP), was formed in November 2021, after a close and inconclusive election in September 2021, which ended the 16-year rule of the Christian Democrats (CDU/CSU). The coalition, led by Chancellor Olaf Scholz of the SPD, has pledged to pursue a progressive and pro-European agenda, based on the principles of social justice, ecological transformation, and democratic renewal. However, the coalition has also faced internal divisions and external opposition, as it has struggled to reconcile the different views and interests of its partners and stakeholders, and to deliver on its promises and expectations.
The budget cuts for 2022 have exposed the tensions and trade-offs within the coalition, as each party has tried to protect its core constituencies and policy areas, and to influence the direction and composition of the fiscal policy. The FDP, led by Finance Minister Christian Lindner, has pushed for the largest and fastest budget cuts, and for the strictest adherence to the debt brake, arguing that this is necessary to ensure fiscal soundness and efficiency, and to respect the constitutional and European rules. The FDP has also opposed any tax increases or new taxes, such as the wealth tax or the digital tax, arguing that this would harm the economic recovery and competitiveness. The FDP has also advocated for more spending on defense and security, and for more market-based and technology-driven solutions to the climate crisis.
The SPD, led by Chancellor Olaf Scholz, has accepted the need