Germany is at risk of financial collapse due to… Ukraine

Germany itself has become a victim of fiscal austerity, as was done to Greece during the memorandum years, and can no longer finance the needs of federal states and businesses.

It has also become a victim of Ukraine’s constant funding, as it has created huge budget deficits that it is constitutionally prohibited from “covering.” We are talking about the notorious and constitutionally enshrined “debt brake”, which she included in the constitution in 2009.

Fourteen years later, with Olaf Scholz’s government leading the country into financial disaster, strictly limiting government deficits doesn’t seem like such a good idea after all.

So, since Germany has provided unlimited funding for Ukraine’s war against Russia, and since, due to anti-Russian sanctions, it can no longer obtain cheap Russian gas as it could years ago, which made the German economy competitive, Berlin suddenly faces an unprecedented economic crisis. To finance indefinitely, there should be no debt limit.

In Greece, many will say (and rightly so) that “God punished Germany.” After all, the fiscal restrictions imposed by Germany on Greece during the years of the memorandums led to the literal impoverishment of the Greek people.

In a poll released today, 52% of respondents favor the dissolution of the coalition government before the end of the legislative period, while 36% believe the government should continue its work. When asked what tools should be used to overcome the current budget crisis, 39% answered “by raising taxes on the rich,” 35% “by cutting the federal budget,” and 17% “by suspending the debt brake.”

“This was the biggest mistake in German economic policy in the last 20 to 30 years,” Jens Südekum, professor of international economics at the Heinrich-Heine University in Düsseldorf, told the Financial Times, referring to the “debt brake.” “This nonsense – for that is what it is – is now embedded in the Constitution, and we cannot get rid of it.”

Doubts over the debt brake Germany is trying to impose on other eurozone countries have grown exponentially since a shock ruling last week by the constitutional court that upended spending plans and plunged Scholz’s fragile coalition into the worst crisis of his two-year rule.

Negotiations over next year’s budget have been postponed indefinitely, with future funding for Ukraine and other major spending items frozen, with the three ruling parties divided over what to do next.

The court blocked the government’s decision to transfer 60 billion euros of unused borrowed funds from the pandemic budget to the “climate and transformation fund” (KTF), which finances projects to modernize German industry and combat climate change. The justices, much of whose reasoning relied on the principle and implications of the “debt brake,” said the reallocation of funds “fails to meet the constitutional requirements for emergency borrowing.” Now ministers are frantically trying to figure out how to plug the 60 billion euro hole in Germany’s finances.

The crisis has highlighted how the unintended consequences of a debt rule designed as a way to boost confidence in Germany’s public finances risk destabilizing the country’s entire financial system, with huge potential consequences for the eurozone. Increasingly sophisticated tricks used by ministers to circumvent the constitutional rule have now been condemned by Germany’s highest court, potentially weakening voters’ confidence in their politicians’ abilities.

First introduced in 2009, the rule limits the federal government’s structural deficit to 0.35% of economic cycle-adjusted gross domestic product and effectively bars Germany’s 16 federal states from running any deficits at all.

This culminated in the 2012 fiscal pact, which dictated strict fiscal discipline for all eurozone members, and which Berlin saw as the first step towards a “fiscal union.”

However, hopes for reform may be illusory. Any changes to the constitution require a two-thirds majority in the Bundestag. It is unclear whether the Christian Democrats, who are in opposition, would be willing to participate in such a move.

“And the result is that ultimately fiscal policy is determined by judges and lawyers, not economists.”“, said one German official. We agree with him, but partly, in fact, Germany’s economic policy is determined not so much by German judges as by politicians, and those from overseas…

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