Germany struggles with weird ways to dodge its debt brake


VISITORS IN MURKY corners of the internet may come across advertisements promising “something strange” to help them lose weight or gain millions. To meet its climate obligations and modernize its digital infrastructure, Germany must mobilize around 50 billion euros ($ 57 billion) per year in public investment. But a “debt brake” inserted in the constitution in 2009 limits the annual borrowing to 0.35% of the nominal. GDP (equivalent to around 12 billion euros). Changing the constitution seems impossible. Squaring the circle means the three parties currently negotiating a coalition deal, after elections in September, will need their own tips.

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Several go around. The first is to create off-budget state-owned enterprises that can tap markets for funds devoted to specific purposes: building insulation, for example, or charging stations for electric cars. Deutsche Bahn, the German rail giant, works this way. A related but distinct proposal is to strengthen the KFW, the public development bank, to enable it to mobilize private funds for green investments. In theory, hundreds of billions could be raised this way, although EU state aid rules are a constraint.

A smarter ruse is to embark on a one-time borrowing frenzy in 2022, exploiting the temporary suspension of the debt brake applied last year, which allowed the government to fund holiday and other schemes during the pandemic. Experts have suggested a sum of 500 billion euros, to be spent over the next decade. But a poorly conceived project could attract the attention of the German Constitutional Court.

Perhaps the smartest wheezing comes from Dezernat Zukunft, a Berlin-based think tank. Noting that the debt brake relies on estimates of the mysterious “output gap” – or the difference between GDP today and a measure of the economy’s potential – the group suggests tweaking some of the inputs to this calculation. Assuming, for example, more labor market downturn than the finance ministry would raise the spending limit. The Conservatives reject the idea, calling it “Pippi Longstocking’s economy”. But it does not involve any legal jiggery-pokery and is based on assumptions no more outlandish than those already used. “No one understands these bureaucratic methods, which is why they are politically attractive,” says Jens Südekum of the Heinrich-Heine University in Düsseldorf. They could add 20 billion euros in annual spending.

More conventional sources may offer tax crumbs. A new global corporate tax deal could bring in a few billion, as could the legalization and taxation of cannabis, possibly under the next government. EU climate funds could offer a little more. The strange subsidy could be reduced. And the government tends to underestimate the projected tax revenues anyway; 2020 brought in € 11.4 billion more than expected (see graph). These won’t flood the chests, but every little bit counts.

Each of these proposals, to varying degrees, could be part of the promised coalition deal by the end of November. The absurdity of some of Germany’s best economic minds concocting intricate plans to escape the country’s self-imposed limitations is not lost on everyone. “It’s ridiculous that so much time has been spent trying to bend the rules we have set for ourselves,” says Philippa Sigl-Glöckner of Dezernat Zukunft. It seldom makes sense to click on “weird stuff” ads. But Germany left itself little choice. â– 

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This article appeared in the Finance & economics section of the print edition under the title “Houdini economics”


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