Election Puts Germany’s Iconic ‘Debt Brake’ Under Scrutiny

Germany’s strict fiscal rules have already contributed to the downfall of Chancellor Olaf Scholz’s coalition government, with the country now likely to head to the polls on February 23 for early elections.

The governing coalition unraveled earlier this month, primarily due to disagreements over Finance Minister Christian Lindner’s proposals to adhere to fiscal constraints. Lindner’s insistence on measures to keep the budget deficit within legal limits faced strong opposition from his coalition partners, the Social Democratic Party (SPD) and the Greens. The situation culminated in Scholz dismissing Lindner, prompting Lindner’s fiscally conservative Free Democratic Party (FDP) to exit the government, paving the way for elections seven months ahead of schedule.

Momentum is building for a comprehensive overhaul of the fiscal rules. This month, the government’s Council of Economic Advisers proposed reforms to allow more flexibility for investment spending, aiming to alleviate political tensions. Similarly, the Deutsche Bundesbank—traditionally a staunch defender of fiscal conservatism—has recently advocated for reforms that would permit “moderately higher borrowing limits,” provided Germany’s overall public debt ratio remains low.

However, amending the Schuldenbremse (Germany’s constitutional debt brake) before the elections will be extremely challenging. Any such change requires a two-thirds majority in both the Bundestag (lower house) and Bundesrat (upper house). The far-right Alternative für Deutschland (AfD) party opposes any reform, as does the FDP under Lindner’s leadership.

Political dynamics further complicate the issue. The center-right Christian Democrats (CDU) are unlikely to back a reform that might benefit Scholz’s SPD and keep the CDU in opposition longer. Instead, they would likely prefer to rewrite the fiscal rules from a position of power if they return to government.

Nonetheless, there is some urgency to act now. Opinion polls suggest that in the next Bundestag, the AfD and the newly formed hard-left Sahra Wagenknecht Alliance could secure enough seats to block any future proposals, potentially giving them disproportionate influence over Germany’s fiscal policy. This possibility has created incentives for existing parties to strike a deal before the elections.

Felix Banaszak, the recently elected leader of the Green Party, called on CDU leaders at the state level over the weekend to pressure their counterparts in Berlin to support an immediate amendment. According to Banaszak, state-level leaders understand the necessity of reform and could push the CDU toward action to secure the country’s economic future.