German coalition parties avert government crisis with compromise on budget

4 months ago 12

Germany’s government coalition reached a political agreement on its budget on Friday (5 July), working around a self-imposed borrowing limit with “quite a few tricks”.

The deal on the budget was preceded by weeks of tough negotiations as the centre-left Social Democrats of Chancellor Olaf Scholz, the pro-market liberal Free Democratic Party (FDP), and the Greens haggled over the balance between sticking to the constitutional debt limit and addressing rising spending needs.

FDP Finance Minister Christian Lindner Lindner, a fiscal hawk, had in particular insisted on not exceeding the limits to additional borrowing set by the country’s legal clause of the ‘debt brake’.

“For a while, we feared that we wouldn’t be able to do it, but we managed,” Scholz told journalists at a joint press conference with green Vice-Chancellor Robert Habeck, and Lindner, after concluding the final negotiations over the night.

Scholz admitted “We don’t always make it easy for ourselves,” following rumours the coalition could collapse if negotiations had failed to conclude before the summer.

The initial deadline for an agreement had already been pushed back due to disagreements over cuts. Last year’s budget had also been significantly delayed due to infighting.

Ultimately, the preliminary agreement relied on “quite a few [accounting] tricks” to balance the two conflicting priorities, noted Rolf Mützenich, parliamentary leader of Scholz’s SPD party and critic of the debt brake.

Scholz added that there was no alternative to finding an agreement, given Germany’s responsibility as the largest European economy.

“Losing your nerve, throwing in the towel, running away from responsibility – I would have no understanding for that at this time […]. Germany must now be an anchor of stability in Europe,” said Scholz, alluding to a possible far-right government in France.

He outlined challenges such as the security threat from Russia and the green transition, which raised new spending needs to address them.

Details unclear

It was not clear if the compromise reached on Friday involved substantial spending cuts, as Lindner refused to confirm a rumour around savings needs worth €50 billion.

He also refused to specify how the government would manage to plug an €8 billion gap in its separate, multi-annual financial planning.

The coalition leaders highlighted a number of measures that are supposed to boost the economy and efforts to strengthen the country’s ailing defence infrastructure.

Scholz promised that Germany would meet NATO’s annual spending target of 2% of GDP, beyond the capacity of its €100 billion defence fund, set up after Russia’s invasion of Ukraine. The 2% figure would be reached by boosting regular defence spending to €80 billion a year.

But for this to be enacted, it would require the SPD to win the country’s national elections next year, currently they are trailing in the polls due to the government‘s general lack of popularity.

Aside from a modest boost to some social spending, the coalition partners promised to increase investment from €53 billion to €57 billion in 2025, and to agree on a ‘growth initiative’ that includes slashing red tape and improving investment incentives.

But there remain obstacles, as the budget still needs to be passed by the cabinet, slated for 17 July, and to be then discussed in parliament after the summer break – with a possible conclusion in November.

[Edited by Rajnish Singh/Anna Brunetti]