What is the controversy over Germany’s debt brake rule?
- December 11, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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What is the controversy over Germany’s debt brake rule?
Subject : IR
Section: Int events
Context:
- Germany’s constitutional court on November 15 ruled unlawful a government move to reallocate €60 billion, unused from the sums initially earmarked for the pandemic emergency, to a “climate and transformation fund” (KTF).
What is the Debt Brake Rule?
- The debt brake rule caps government borrowing and restricts the federal government’s fiscal deficit to 0.35% of GDP, while prohibiting deficit spending by Germany’s 16 regions.
- This rule was incorporated into German law in 2009 by a coalition, mirroring the EU’s Stability and Growth Pact and the 2012 Fiscal Compact Treaty.
Challenge and Its Legal Implications
- Opposition’s Argument: It argued that climate change and energy transition investments, being long-term, shouldn’t be funded by the debt brake’s emergency exemption, which was specific to COVID-19 relief.
- Government’s Defense: The government contended that the reallocated funds addressed economic consequences of the pandemic by linking investment shortfalls to COVID-19’s economic impact.
Economic Performance Of Germany Since 2009
- Pandemic Response: In 2020, the debt brake rule was suspended for pandemic-related borrowing, with plans for reinstatement.
- Mixed Outcomes: Germany experienced growth and budget surpluses in the last decade, benefiting from low-interest policies of the ECB.
- Zero-Deficit Budget: The government achieved a zero-deficit budget, promoting it as an ideal approach for the EU during a sovereign debt crisis.
Criticisms:
- A cooling economy highlighted under-investment in infrastructure.Critics urged for expansionary fiscal measures, while others favored higher taxation.
- Chancellor Angela Merkel emphasized the need to avoid burdening the younger generation with debt.