Scholz and Lindner sceptical about reforming German debt brake

By Thomson Reuters Apr 23, 2024 | 11:54 AM

By Maria Martinez and Andreas Rinke

BERLIN (Reuters) – German Chancellor Olaf Scholz and Finance Minister Christian Lindner both expressed scepticism on Tuesday about reforming the country’s ‘debt brake’, but Bundesbank president Joachim Nagel said he saw scope for adjustments.

A reform of the constitutionally enshrined debt brake, which limits public deficits to 0.35% of gross domestic product, would require a two-thirds majority in the upper and lower houses of parliament, but some regional politicians have recently raised the possibility.

“I think the issue is being overestimated. It will not be a solution to the challenges we are currently facing,” Scholz told a banking conference, adding that he did not believe any reform would be possible this year or next.

“In this respect, I am concentrating on the options for action that we have now,” said Scholz, a Social Democrat, adding that debate on the matter should be conducted in a non-partisan way.

The debate has been reopened after the Mayor of Berlin, Kai Wegner, from the conservative Christian Democratic Union (CDU), announced an initiative to reform the debt brake.

Several state leaders have said they are open to reform because, unlike the federal government, the states are no longer allowed to incur any new debt.

The International Monetary Fund said last week that Germany could raise its debt brake from 0.35% of gross domestic product to 1.35% while still reducing its debt/GDP ratio.

Lindner, known for his fierce support of the debt brake, defended it as “a brake on inflation”.

“The debt brake is currently being blamed for everything and so are the defenders of the debt brake,” Lindner told the same conference. “But it is neither a brake on investment nor a brake on progress, because we are investing in the public budget at a record level.”

However, speaking at a separate event on Tuesday, Bundesbank chief Nagel said debt brake adjustments were possible.

“In our view, the debt brake helps to improve financial stability in Europe. However, we can imagine under certain conditions, let’s assume for example that the debt curve in Germany slips below 60%, that we could then have higher deficit ratios,” Nagel told the Foreign Press Association.

“What is important to us as the Bundesbank is that we should definitely have an organised, professional discussion on the subject of the debt brake.”

(Reporting by Maria Martinez and Andreas Rinke; Editing by Gareth Jones)