The Brief – German government tricks itself out of a budget crisis, again

Once again, the German government has used accounting tricks to reconcile its spending wishes with the rules of its constitutional ‘debt brake’ – but unlike the tricks faulted by the country’s Constitutional Court last year, this time experts say it’s waterproof.

Last Friday (5 July), the heads of the three-party coalition, the SPD, the Greens, and the liberal FDP, announced after an all-nighter they had reached a deal on the 2025 budget.

Unlike previous expectations, this did not include major austerity measures but turned out to be only slightly smaller than this year’s budget of €489 billion (which was also increased from €476 billion).

“This came to the surprise of everyone,” Jens Südekum, a professor for international economics at Düsseldorf University, told Euractiv.

How is that possible, notably given the tough stance of Finance Minister and self-proclaimed “fiscal hawk” Christian Lindner (FDP/Renew), who made his stay in the coalition conditional on fulfilling the ‘debt brake’, the country’s strict limit for structural deficits, to 0.35% of GDP per year?

“Lindner, from my interpretation, has barked that he is the guarantor of the debt brake, but in the end, he did not really bite hard but proved quite flexible,” Südekum said.

To explain the mystery, it is necessary to look into the fine print of the agreements, which includes 7-8 instances of what Südekum calls “budgetary finesse, or legal ‘tricks’, if you will”.

These include a “global budget reduction” of €16 billion, i.e. a commitment to spend less than what is written into the text (without specifying where) – double what is usually counted in.

It also includes some technical changes on how to account for the economic cycle in the debt brake, which increases fiscal leeway by another few billion euros.

This change was “useful, but small”, Florian Schuster of Dezernat Zukunft, a think-tank close to the main government party, the SPD, told Euractiv, and far below what his think-tank, or the SPD, had previously pushed for in terms of adjustments to the debt brake.

Furthermore, some “financial transactions” not counting towards the debt brake, such as loans for Germany’s ailing railway operator Deutsche Bahn, will be explored, alongside a calculated reallocation of interest charges over several years.

Südekum – a long-standing critic of the debt brake – called the solution “elegant”, but also noted that it is not the “big bang” the country would need to fulfil its public investment needs, which industry association BDI has recently estimated at €400 billion over the next ten years.

Budget tricks are part of the coalition’s DNA

Germany’s government coalition has used accounting tricks from its beginning, to paint over the differences in the three parties’ ideologies.

Otherwise, it might not have been possible to convince hawkish Lindner into a coalition with pro-spending Social Democrats (SPD/S&D) and Greens.

It is said to be Chancellor Olaf Scholz (SPD) himself who came up with the initial idea to re-allocate €60 billion from unused COVID-related funds to a “climate and transition fund”, to circumvent the strict spending limits of the constitutional debt brake.

“This has allowed Lindner to say the debt brake was fulfilled, while the Greens and SPD could show that they are serious about climate investments,” Südekum said.

However, this initial trick did not work. Last year, the Constitutional Court declared it unconstitutional, arguing that crisis-related exceptions can only be used for crisis-related expenses and must be spent in the same year.

This has shaken the coalition, as quickly-agreed cuts, such as for agricultural diesel subsidies, have triggered a wave of farmers’ protests across the country.

This time, the government managed without any publicly announced cuts.

At the same time, “to my knowledge, there is no one questioning the legality” of the accounting tricks used this time, Südekum said. “The coalition was very successful in coming up with new budgetary techniques, so to speak”.

Even Reiner Holznagel, head of low-tax lobby group “Taxpayers’ Association”, told journalists on Tuesday (9 July) he wouldn’t consider it “trickery”, calling it “common practice”, but also noting that “that’s not to say it’s a positive thing.”

Conservative opposition CDU/CSU, which brought the COVID/climate fund trick to court in 2022, declined to respond to a question by Euractiv on whether it considers going to court again.

It would not be well-advised to do so anyway, Südekum said, as the conservatives are leading the polls and are on course to take over after next year’s federal election.

“The result would be that you would then have to remedy this somehow in the 2026 budget. But then it would fall on the CDU/CSU, because they want to win the election and they would then have to foot the bill themselves,” Südekum explained.

In any case, what has been possible this year will not solve the problems of the future, Südekum noted.

At the end of 2027, a €100 special billion fund for the German military – whose legality has also not been questioned – will be used up, which means the government will have to fulfil NATO’s 2% defence spending target taking from its regular budget.

Therefore, Südekum expects the next government to somehow find a sizable workaround to the debt brake, possible with another special fund – Sondervermögen – of a few hundred billion euros, to be written into the constitution with a two-thirds majority, as proposed by the BDI.

“I believe it will happen. Not with this three-party coalition, but with the next government,” Südekum said.

The Roundup

The left-wing Nouveau Front Populaire (NFP) coalition, the relative winner of France’s snap legislative elections, is set to lead negotiations on a future coalition government but internal disagreements over a few fundamental EU files could test the alliance’s survival. 

The UK’s new centre-left government has pledged to champion British farming and prioritise food security, but questions linger over Labour’s plans for the country’s post-Brexit farming policies.

The chair of the European Parliament’s Agriculture and Rural Development Committee (AGRI) will go to the Conservatives, the current European People’s Party (EPP) coordinator for agriculture Herbert Dorfmann, told Euractiv, as they aim for the post of Commissioner for Agriculture.

The president of the far-right Rassemblement National, Jordan Bardella, already saw himself as France’s new prime minister last week but was instead elected to lead the Patriots for Europe group in the European Parliament, remaining for the time being trapped behind a watertight cordon sanitaire.

A government compromise in Berlin envisions radical changes to the country’s renewables subsidy approach and details a fleet of backup power plants to underpin the country’s coal exit.

Spain’s Court of Auditors imposed on Tuesday two sanctions on the far-right VOX party, the third force in the Spanish parliament, for what it said were two serious violations of Spanish law on party financing.

The Austrian energy minister launched a task force of independent experts to examine the country’s long-term gas contract with Russia’s Gazprom on Tuesday, including investigating the level of political involvement in the 2018 signing.

The different stances on Russia among the parties that have joined the new Patriots for Europe group in the European Parliament are not problematic, according to the group’s Czech member, ANO.

Look out for…

• Commissioner Nicolas Schmit receives representatives from Copa-Cogeca on Wednesday.
• Economy Commissioner Paolo Gentiloni in Ireland, meets PM Simon Harris and Finance Minister Jack Chambers on Thursday.
• Informal meeting of environment ministers, Thursday-Friday.

Views are the author’s

[Edited by Zoran Radosavljevic]