Chartbook 357 Legitimate maneuver or end run around democracy? Why the CDU-SPD plan to lift the German debt brake is not a done deal.

In the last 15 years the tragedy of Europe has been democracy’s tendency to obstruct itself.

The continent desperately needs investment for a big green growth push. Instead it hampers itself with fiscal rules adopted for fear of national free riding. This summer the Draghi report described the sluggish investment and innovation to which fiscal self-obstruction has contributed.

At the core of this self-defeating regime and arguably its chief victim is Germany.

In 2009, against the backdrop of the financial crisis, Angela Merkel’s coalition of CDU and SPD passed a constitutional amendment. Between them, the two parties at the time commanded an impressive 69.4 percent of the national vote. At the time they deserved the title “Grand Coalition”. With their two thirds majority secure they easily passed an amendment limiting the federal government in normal times to deficits of no more than 0.35% of gdp, with some cyclical adjustment. State (regional) and local government are required to operate on a balanced budget basis.

The effect has been to compound a fall in public investment that began in the early 2000s.

If there ever was a case of a high-functioning democracy sabotaging itself, this was it. As detailed in Chartbook, the impact on German society has been increasingly crippling.

Despite a long-standing campaign from the technocratic progressive side, including many friends of Chartbook, the mainstream parties including the SPD remained committed to the debt brake.

The debt brake does provide for exceptions. Such a moment came with COVID in 2020. Both at the national and European level the team around Olaf Scholz as Finance Minister and Deputy Chancellor broke through the blockade. What emerged was a large spending program for Germany and, at the European level NextGen EU, without which Europe’s recovery would have been even more anemic.

The Scholz-led traffic light coalition of 2021 picked up where the Merkel-Scholz government left off. To circumvent the debt brake, they agreed an off-balance sheet climate fund. Then, when Putin invaded Ukraine, they added a fund for the Bundeswehr. To plug gaps and increase the resources at their disposal they rolled over COVID funding. The liberal FDP with Lindner as Finance Minister, though nominally hard line on fiscal policy, played along, until November 2023 when a ruling by the constitutional court blew up the makeshift accounting compromises that were holding the coalition together.

Meanwhile, from the opposition benches the CDU led by Friedrich Merz never ceased vociferous attacks on the “spendthrift” government. From the far-right, the AfD, which was founded as an anti-Draghi party, was no less aggressive in its defense of the debt brake.

By 2024 the fiscal compromise that had enabled the traffic-light coalition had collapsed. The government was increasingly deadlocked and on November 6 2024 Scholz, in a rare moment of initiative, fired Lindner.

The fact that Scholz made his move the day after Trump’s election was no accident. The uncertainty in Washington, the deteriorating situation of Ukraine and Germany’s mounting anxiety about deindustrialization made it clear that something has to be done. There were rumors that the CDU, which it was assumed would lead the new government, would jump the fence and join those willing to rewrite the debt brake. But during the election itself, Merz gave no hint of any change in course.

Now, with the CDU and SPD negotiating over a new government, they have come up, in record quick time with a spectacular package that appears to entirely rewrite the rule book.

The debt brake will be suspended for all military spending in excess of 1 percent of GNP.

A special infrastructure fund will set aside 500 billion euros for investment.

A commission will be convened to discuss the long-term future of the debt brake.

Behind the scenes, the new plan seems to have been cooked up by the network of experts that formerly advised Olaf Scholz as Finance Minister. The anchor of this group is Jakob von Weizsäcker who formerly headed the Economics Department in Scholz’s Ministry and is now serving as Finance Minister in the SPD-led regional government of Saarland. He convened the usual suspects amongst Germany’s research Institutes to frame the deal, including both academic, policy and business-orientated groups. Specifically, the authors are Clemens Fuest (Ifo-Institut), Michael Hüther (IW Köln) Moritz Schu­larick (IfW) and Jens Südekum (Universität Düsseldorf).

The markets estimate that the overall volume of debt could rise to as much as 1 trillion euro. The market for German government bonds, Bunds, twitched. The reaction in global bond markets has been surprisingly severe.

But, as everyone has long known, Germany can easily carry this volume of debt.

The economics are obvious and are being celebrated in op-ed pages around the world. What this ignores are the implications for German democracy of the CDU-SPD proposal, a hair-raisingly presumptuous technocratic construction that demands a topsy-turvy parliamentary maneuver to avoid the political implications of the election on February 23rd. Even for a die hard proponent of debt brake reform like myself, this raises profound questions.

The basic problem is that the CDU and the SPD, which between them under Merkel commanded almost 70 percent of the popular vote, are now lucky to be able to form a simple majority. The combined CDU-SPD vote share is actually only 44.5 percent. Merz will command a governing majority only because the 5 percent hurdle excludes a substantial fraction of the voters split between FDP, Wagenknecht’s movement and other, smaller parties.

To implement their bold plan, the Merz led CDU-SPD coalition will need partners who are not in the government.

That was, of course, also true for the traffic light coalition that was broken by the debt brake and just voted out of office. If the CDU had cooperated, even if Lindner and FDP had dug in, the Scholz government could easily have assembled the two thirds majority necessary to revise the debt brake and remove the constitutional check on the necessary spending. To anyone focused on fiscal policy it was clear already from the summer of 2024 that only this so-called Kenya coalition - SPD (red), CDU (black), Greens - offered any hope of capable and progressive government in Germany.

But Merz refused any cooperation. He behaved belligerently, particularly towards the Greens. And during the election, he gave no grounds on the debt brake.

Now, with Merz looking forward to being Chancellor, what the CDU and SPD are counting on is that the Greens in the lame duck Bundestag parliament will act as though they are loyal members of a Kenya-coalition government to which they are not, in fact, invited.

To call it presumptuous to count on the Greens for this maneuver would be a euphemism. The German word would be Zumutung (exorbitantly unreasonable demand).

What Merz wants to avoid at at all costs is having to pass a constitutional amendment on the basis of the election result that will put him in office. Once the new Bundestag elected on February 23 2025 convenes, Merz will be Chancellor, but a two thirds majority will require the far-fetched coalition of the CDU, SPD and Greens, with Die Linke.

Die Linke are not only anathema to the CDU on general ideological grounds. They will also dig their heels in over increasing defense spending. Talking to senior party figures last week, it was clear that Die Linke are willing to loosen the debt brake for public spending as a whole. But they will not agree to a carve out limited to defense spending as proposed by the CDU-SPD negotiators. Presumably, Merz for his part wants to avoid a general loosening for fear of antagonizing the fiscal hawks in his own camp. They will agree to a loosening for national security reasons, but not a general relaxation.

Furthermore, the way that the deal is constructed, the cost of servicing the new debts that will be piled up for infrastructure and defense will come out of the general budget, which will exercise serious pressure on social spending. This is very much in the spirit of hardliners like Markus Söder of the Bavarian CSU, but at odds with the priorities of Die Linke and what is left of the left-wing of the SPD.

In short, the dramatic proposal from the CDU-SPD which is causing such a stir in global markets has no chance of finding a two thirds majority once the new parliament meets. It must, therefore, be bounced through the lame duck session with the putative support of the Greens.

So the exorbitant demand that the CDU and SPD are making is:

• CDU voters should ignore the glaring discrepancy between Merz’s position during the campaign and the new CDU-SPD proposal, an about face presumably justified by Trump.

• The old Bundestag should preempt the new parliament in the lame duck session.

• The Greens should vote with the CDU and SPD even though they will not be part of the new government - an act of fair minded democratic cooperation that the CDU itself refused.

• The Greens should support a package that releases the debt brake only for defense, whilst the infrastructure fund ostentatiously deemphasizes green issues like renewable energy and climate.

All of this contortion is in aid of avoiding the compromises that would be necessary if you tried to pass the amendment on the basis of the parliament that was actually elected on February 23rd.

The window of opportunity for this maneuver is narrow. It has to be done fast. Even if its first meeting is delayed until the latest possible moment the new Bundestag must convene no later than March 25th. The question facing the CDU and SPD in the coming days will be whether they can find the necessary votes. For a two thirds majority they need 489. Between them the CDU and SPD have 403. To find the missing 86 votes they must persuade the Greens with 117 members of the Bundestag or the FDP with 90 to vote for them.

A possible timetable would involve a first reading in the Bundestag next Thursday on March 13th, followed by committee hearings on March 14th and a second and third reading on March 17th with the Federal Council (Bundesrat) voting on March 21st. If the proposal gets that far, the Federal Council will require even more maneuvering because a two thirds majority will require at least two state governments with FDP members to support the CDU, SPD and Green push to end the debt brake. At least 100 billion euros is provided in the infrastructure fund for regional and local governments. Presumably this sweetener is intended to provide an inducement to regional governments to agree to the debt brake move.

Perhaps the Trump-Putin effect will prevail. Perhaps the Greens will feel that they have no option but to back the Merz-led CDU-SPD coalition, however cynical its maneuvering. Some kind of dirty deal was always likely to be necessary to get the debt brake lifted. Perhaps it was simply too much to expect Merz to make concessions if this involved a tacit deal with Die Linke. Perhaps this is the best one can hope for. Even if we have been waiting for this moment for more than a decade it is a grim lesson in actually existing parliamentary politics. Certainly it would be rash to assume that this is a done deal.

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