Germany May Abandon Its Beloved Black Zero

In view of the pressure coming from all sides, the statements coming from Merkel and Scholz seem like marching orders from the top. This can’t be easy for the finance minister, not least because confidence in the utility of the debt brake and a balanced budget has been dwindling within his party. There’s also an influential faction of career bureaucrats within the Finance Ministry who believe it will be impossible to finance every climate protection initiative that’s been announced by the various ministries without any additional borrowing. Some 32 billion euros would be needed to implement these projects between now and 2023.

To Borrow or Scale Back

A total of 66 measures have been submitted by six different ministries. They include, for example, 50 million euros earmarked for the Central African Forest Initiative, along with a program for improved material and resource efficiency in industry (110 million euros) and a nearly 1 billion-euro infrastructure program for bicycle paths. The problem is that there is no funding yet for any of these programs.

Officials within Scholz’s Finance Ministry have calculated that between 5 and 15 billion euros for new climate protection measures would be compatible with the goal of a balanced budget. And even that will only be possible if the government finds some additional money. In that sense, Merkel’s and Scholz’s commitment to a balanced budget will also likely mean scaling back Germany’s vision for a comprehensive climate protection regimen.

Scholz could mobilize the necessary funds for a scaled-down version by shifting around money in the budget, but for the most part, those funds will still come from a new CO2 emissions tax that the coalition government hopes to have hammered out by Sept. 20. The conservatives in government, made up of Merkel’s CDU and its Bavarian sister party, the Christian Social Union (CSU), favor a solution in which permits to emit CO2 are auctioned off. But the Social Democrats would prefers to levy a tax on every ton of greenhouse gas emitted.

Either way: The money is to flow into the existing energy and climate funds from which the measures will be financed. At the end of 2019, they will have combined account balances of roughly 7 billion euros, which would be enough to keep the federal budget balanced for at least the next year.

The chancellor herself is largely responsible for this. Her supporters are notoriously unhappy with the government’s current coalition agreement, which Merkel’s conservatives negotiated with their Social Democratic partners. They believe the CDU got the short end of the stick. But Merkel has been able to accomplish two of her goals: First, she hasn’t had to raise taxes at all, and she has also managed to maintain the balanced budget agreed to in the coalition contract.

‘An Achievement We Cannot Give Up Lightly’

That first pledge, though, could soon be undermined by the planned climate protection policies. Regardless of how carbon dioxide is taxed in the future, it will amount to an additional burden on both people and businesses. That’s why it would be extremely difficult, politically, for Merkel to give up on her second goal.

“The balanced budget is an achievement we cannot give up lightly,” says Andreas Jung, deputy head of the joint CDU and CSU parliamentary group in the Bundestag, Germany’s federal parliament. His portfolio is budget and finance, and together with a CSU colleague, he has also accepted the task of drawing up the Christian Democrats’ climate protection plan. He argues that sustainability is not only an imperative in environmental policy, but also a necessity when it comes to government fiscal planning. “Both go together, and both are also expressions of intergenerational fairness,” he says.

Scholz, as the SPD finance minister, also has good reasons to cling to the balanced budget. For Scholz, a budget without any additional borrowing under his aegis is proof of good governance on the part of the Social Democrats — and also that they’re responsible with money and not just a tax-and-spend party.

He’s also well-aware that the conservatives would never abandon both of these key issues in the coalition treaty at the same time. In that sense, it hasn’t even been worth his while to test the limits of the debt brake.

A Psychological Barrier

But the debt brake does, in fact, leave some room for maneuver. Overall, Scholz could borrow about 12 billion euros a year if the economic situation didn’t provide him with any additional revenues. But for years now, the government has succeeded in generating extra revenue without having to rely on borrowing. The additional income, which is cyclical and tied to positive economic developments, is calculated in a complicated procedure and restricts the finance minister’s ability to borrow. According to officials in his ministry, though, Scholz could almost completely exhaust this maximum limit in the coming years without even violating the requirements, because the additional revenues attributable to positive economic developments are no longer expected due to the economic downturn.

The leeway provided by the debt brake could easily be enough to finance climate protection measures until 2023, but Chancellor Merkel and Finance Minister Scholz are preventing this from happening by clinging to the idea of a balanced budget.

In fact, the fixation on a “black zero” is a psychological barrier. Economically, it makes no difference whether the German government generates a surplus of 10 billion euros, takes out loans of the same amount or gets by without new borrowing. Measured against a budget of over 350 billion euros and a GDP of 3.3 trillion euros, the order of magnitude is infinitesimally small, regardless of whether the zero on Germany’s books is black or red. And yet conservative politicians still seem reluctant to let go of the balanced budget they have grown so accustomed to. To them, the balanced budget is an instrument with a disciplining effect. They believe many spending requests aren’t seriously considered because they would jeopardize the goal of a balanced budget, which is highly regarded by many German voters.

A Breach in the Dam?

Some worry that a new sense of greed could be kindled if the goal of a balanced budget is scrapped. “If the zero point is crossed, I fear that there will be a breach in the dam that can no longer be plugged,” says Jung, the deputy head of the CDU and CSU parliamentary group.

Many conservative Christian Democrats also don’t believe the current economic slowdown provides justification to go full swing with government spending to counter a possible downturn. “Right now, an economic stimulus package would be inappropriate and ineffective,” argues Eckhardt Rehberg, the leading budget policy planner for the CDU and CSU in parliament. “The federal investment coffers are full to bursting with money, they just need to finally get tapped.” The construction industry, which would benefit most from state investment programs, is already working at full capacity. “We have to preserve our ability to act in the face of severe crises and not spend the whole wad of cash at the slightest drop in gross domestic product.”

Increasing Willingness To Let Go

Even though the coalition government in Berlin isn’t ready to actively counter the downturn yet, Merkel’s Chancellery and Scholz’s Finance Ministry are becoming increasingly willing to insist less on a balanced budget in order to avoid exacerbating a possible economic crisis. If the economy continues to shrink even more in the coming months, and tax revenues collapse and social spending rises as a result, sources in both the Chancellery and the Finance Ministry say there will be a willingness to veer from the balanced budget and begin borrowing.

Using financial jargon, a senior government official puts it this way: “We’ll let the automatic stabilizers do their work, even if that puts the black zero at risk.” In layman’s terms, this means the holes that would be torn in the federal budget by an economic crisis would be plugged through new borrowing. This applies to both the current budget and the one for next year that Finance Minister Scholz is to present to parliament at the beginning of September.

Article source: https://www.spiegel.de/international/germany/germany-may-abandon-its-beloved-black-zero-a-1282978.html#ref=rss