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Germany: A green recovery at last?

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Olaf Scholz, now German Chancellor, sppeaking in 2018 as the Vice-Chancellor and Federal Minister of Finance, Germany, speaking at the OSCE Plenary Session, Berlin. Photo via OSCE on Flickr.
Olaf Scholz, now German Chancellor, speaking in 2018 as the Vice-Chancellor and Federal Minister of Finance, at the OSCE Plenary Session, Berlin. Photo via OSCE on Flickr.

This week, the German parliament debated a €60 billion amendment to the federal budget (“Nachtragshaushalt”) focusing on the climate transformation of the economy.

The government’s swift action may be a signal of its ambition. But it is just as much a product of political compulsion, for which Germany’s tight fiscal policy limitations are responsible, such as the debt brake, which restricts annual fiscal deficit to just 0.35% of GDP. The Nachtragshaushalt could set a precedent for governments finding themselves between the proverbial climate transition rock and the fiscal hard place – but it will not be able to solve the structural deficiencies of low public investment.

Money, money, money

Will the new government be able to put its money where its mouth is? The ambitious plans to decarbonise electricity, heating and industry sectors call for enormous investment (the Greens floated a figure of €50 billion per annum in additional public investment during the election campaign). But the fiscally-conservative liberal party has made clear that the debt brake would have to remain untouched.

Germany – a key architect of the European Stability and Growth pact – limited its fiscal flexibility in 2011 when it introduced the debt brake. Requiring a two-third parliamentary majority to change, it is now an unmovable roadblock for expansive government spending – raising new debt is restricted to a marginal percentage of German GDP.

A German solution

Circumventing the debt brake requires creativity – and political opportunity. In the wake of the COVID-19 pandemic and the need for economic support, parliament suspended the debt brake until 2023, giving the then finance minister (and now chancellor) Olaf Scholz ammunition to overcome the crisis with “wumms!” (German expression for “Suddenly, forcefully and with speed!”). However, two years into the pandemic, €60 billion of the approved €240 billion in economic aid has not been disbursed.

Christian Lindner, new finance minister and leader of the FDP has now drafted a budget amendment. Rather than leaving the €60 billion of COVID-related fiscal space untapped, the new government has decided to carry it forward and redirect it towards Germany’s climate transformation. The money will be injected into a transformation fund (formerly Energy and climate fund), a “special capital” instrument of the government (and thus outside the scope of the debt brake). Mr Lindner will be keen to clarify that the amended budget is still part of the recovery package, to counter opposition arguments that his fiscal hawk resolve is weakening.

A green precedent for Europe?

The EU`s Recovery and Resilience Facility (RRF) and the NextGenerationEU budget have been Europe’s strongest joint fiscal response ever. However, despite a quota for green recovery spending, E3G analysis suggests that recoveries in most EU countries have been insufficiently climate focused. Could, as now in Germany, untapped COVID-recovery funds be repurposed for the climate transition? Rather than missing the chance of a Keynesian stimulus package, governments should use any remaining headroom for transformative investment in the economy. The German model is perhaps not the most elegant solution, but it could finally be a green recovery.

Two major caveats

Such short-term opportunism cannot conceal the dire need for more comprehensive fiscal reform. Indeed, leaders across Europe have already called for reform of the European Union’s fiscal rulebook, and the European Commission has recently launched a review of its economic governance framework. Two major caveats urge for caution:

  1. Europe, and Germany in particular, have the comfortable position of being able to afford a recovery in the first place. Many developing and emerging economies face significant financial pressure and lack access to affordable capital on international markets. Structural international reform is urgently needed, allowing for sustainable debt management and appropriate fiscal stimulus to ensure a just, resilient, and sustainable recovery globally.
  2. Fiscal hawks are likely to wait for the right moment to call for spending restraint, especially in the light of (albeit supply-shock induced) inflation. Fiscal policies must be reformed now to provide a long-term perspective for public climate transition investment and ensure resilience against a fiscally-conservative backlash.

Estimates suggest that the EU-wide transition will require additional investments of at least €100 billion per year. Germany’s fiscal creativity is a welcome short-term policy of an otherwise economically orthodox country. But it is insufficient to conceal the fact that public spending in Germany and Europe at large is in no shape to take on the greatest economic transformation since the industrial revolution.

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