Austerity returns again to the Germany of Olaf Scholz

One might have thought that, with a Social Democrat like Olaf Scholz in the Federal Chancellery replacing the conservative Angela Merkel, there would be a change in the attitude of German political leaders towards money. Now, it does not seem that there will be big changes after all. Thus, this Friday, Scholz's Finance Minister and leader of the FDP liberals, Christian Lindner, seemed to dust off in Berlin some of the forms of Wolfgang Schauble, who was the holder of that portfolio for almost a decade of the Merkel era.

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According to the draft budget accounts for 2023 presented by Lindner this Friday, Germany, after three years in which the country agreed to borrow – two years with Merkel in power and another with Scholz as chancellor – will once again respect “the brake Of the debt". That "brake" is the name of a provision of the Manga Charter that had been suspended due to the effects of COVID-19 and that requires that the deficit not exceed 0.35 percent of GDP.

“The Government has decided to act again within the debt brake. With this we ensure the capacity to act, we relieve citizens and companies and we invest in the future of our country”, they stated in the Ministry of Finance on account of the intentions of the German Executive presented by Lindner.

As a result, by 2023, the German State plans to borrow only 17.2 billion euros, an amount that represents a tiny fraction of what Merkel first, and Scholz later, accepted as debts in 2020, 2021 and 2022.

Those three years, the debts totaled almost 490,000 million euros. 2021 was the year with the highest indebtedness, representing 215.4 billion euros in debt. In 2022, in the first budget that Scholz has approved, the debts amount to 138.9 billion euros.

The COVID-19 pandemic, which made it necessary to support companies whose activity had to be stopped for public health reasons, in some cases with aid packages of billions of euros, justifies a large part of all this indebtedness. But, despite the effects of the pandemic, in Germany neither conservatives – the FDP is a liberal-conservative party – nor social democrats they had really forgotten about the “debt brake”.

Celebrate “financial political normalcy”

Hence, in one of the earliest editorials published on account of the budget project, which appeared in the conservative daily Frankfurter Allgemeine Zeitung, the work of the FDP in returning to “normal financial policy” was celebrated. According to the accounts of this "normality", in 2024 the idea is that the indebtedness will continue to be very low, at about 12,300 million euros, somewhat less than in 2025 (12,800 million euros) and than in 2026 (13,800 million euros).

Lindner, who had been seen these days "obsessed with the brake on the debt", in the terms of Tim Szent-Ivanyi, a journalist in Berlin for the Network of German Newsrooms (RND, for its German acronym), also presented this Friday the will of the Government to continue maintaining investments at a “high level”.

This is how Linder and company defend the idea of ​​continuing to launch public investments of around 52,000 million euros per year over the next three years. This investment level is possible thanks to public spending that will also remain at very high levels, close to 450,000 million euros in 2023. In 2022 the figure was around 500,000 million euros.

In his presentation, Lindner also had time to point out that his country needed "precise" economic relief to combat the loss of purchasing power that is taking place in the country due to inflation. In June, the rise in prices in Germany remained at record levels, with 7.6%, a percentage somewhat lower than that attributed to May (7.9%).

The German government has already spent billions of euros trying to alleviate the effects of this inflation, with measures such as monthly tickets for public transport at nine euros for this summer. During this summer the accounts agreed upon by Lindner and company in the coalition of social democrats, environmentalists and liberals led by Scholz may precisely tally. But there are not a few observers who point out that more measures will soon be needed, for example, to fight the rise in prices.

Some pending budget accounts with many variables

In the coalition itself there were skeptical voices about ideas such as the very return of the "debt brake". "There are many unknown variables for the fall," said Dennis Rohde, the head of budgetary policies for the Parliamentary Group of the Social Democratic Party of Germany (SPD), in a statement collected by the Süddeutsche Zeitung newspaper on account of the 2023 budget.

Among those variables that can modify the accounts presented by Lindner is, in the first line, more economic consequences derived from the illegal invasion of Russia against Ukraine, another wave of COVID-19 infections or an expected rise in interest rates charged by the European Central Bank.

Another aspect that raises critical comments in Lindner's accounts are the forecasts for economic growth. The Ministry of Finance believes that Germany will grow by 2.2% this year and 2.5% in 2023. As a result of the war in Ukraine, however, growth forecasts have been revised very downwards. At the beginning of the year, the German government believed that the economy would grow by 3.6%.

Factors like that may still call into question the "economic change" that Lindner says is taking place in his country with the Liberals in office. "Not only do we have a change in terms of security, but also economically," Lindner recently told the Sunday Welt am Sonntag. With this, Lindner also alluded to the 180-degree change brought about by Scholz as a result of the Russian invasion that Ukraine is still suffering.

Since the end of February, Scholz assured that his country was going to stop being dependent on Russian energy sources and, among other things, that it would spend 2% of its GDP on Defense as of 2024, in addition to creating a special fund endowed with 100,000 million euros to rearm the German Army.

Lindner's “economic turnaround” comes four months behind the start of the war. But given the variables on which their accounts depend, Scholz, Lindner and company may have to pick up the calculator again and do budget calculations sooner rather than later.

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