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A Hamilton moment for Ukraine?How to fund a collective European effort for Kiev without violating the German debt brake

It has been the most difficult fiscal birth ever but in late January the German government coalition finally managed to agree on a budget for the year 2024. Prior to this landmark decision, the “traffic light” partners – Chancellor Olaf Scholz’ Social Democrats, the Greens and the Free Democrats – had fiercely disputed about budgetary priorities, the adequate balance between future investments and welfare spending as well as the deeper sense of the so-called debt-break, limiting annual debt to 0,35 percent of the gross domestic product. A previous attempt by the coalition to circumvent the dept brake by transferring unused rescue funds from the Covid era into a special climate and transformation vehicle had been banned as unconstitutional by the Federal Constitutional Court.


The new budget entitles the German government to spend no less than 470 bn Euros until the end of this year – a plus of almost a third compared to pre-Covid volumes (ca. 350 bn Euros), and (on a side note) about as three times the annual budget of the European Union. And whereas, of the new total, around 100 bn Euros are needed to subsidize public pensions (the system being chronically underfunded for demographic reasons), Finance Minister Christian Lindner (Free Democrats) emphasized when presenting his budget plan that investments in roads, railways, broadband, education and the military have reached a record high of 70 bn Euros. Also, Germany finally fulfils the NATO ask to spend 2 percent of its GDP in defense after having missed this target for many consecutive years. “We actively shape our future without burdening the following generations with higher debts”, Lindner concluded in visible satisfaction.


Or quite so! In the eyes not only of left-leaning media, workers’ unions and welfare associations, but also of his beloved coalition partners, the Social Democrats and the Greens, the debt brake has outlived itself and should be adapted in order to open the avenue towards additional financial capacities. Less funny for the finance minister, even the independent Economic experts’ Council – the so-called “Five sages” – have published, on January 30th, a paper advocating for looser budgetary rules. This surprising move makes life particularly tough for Lindner whose party has made clear on various occasions that their further stay in the current coalition will strictly depend on maintaining the debt brake and abstaining from tax increases.


When Putin sets the rules

In the end, however, all will depend on the war in Ukraine. If the situation on the battlefield gets worse, with Putin’s troops penetrating deeper and deeper into Ukrainian territory, expectations will rise against the West to substantially increase its support for Kiev. Chancellor Olaf Scholz may then, in a first step, refer to a special clause allowing to disrespect the debt brake in “an exceptional emergency situation beyond the control of the government”. However, since this clause leaves plenty of room for interpretation, risk is high that making use of it will drive the Free Democrats, already fighting for parliamentary survival, towards the exit. Since this could mean the end of Scholz’ chancellorship, the Social Democrat from Hamburg, in hanseatic coolness, will rather turn towards Europe in order to solve the problem. Already, on January 31st, Scholz, together with the Prime Ministers of Denmark, the Czech Republic, Estonia and the Netherlands, published an Op-Ed in the Financial Times calling for “a collective effort to arm Ukraine for the long term[1] ”. “Russia doesn’t wait for anybody”, the five Heads of Government warn and claim that Europe’s future will depend on a significantly enhanced support for Ukraine. But, while Scholz and his fellow partners do not further elaborate on how to finance additional military support, you may read between the lines of their piece that ultimately new financial means will have to be generated on EU level, preferably by common debt. During Covid, the then German Finance Minister Olaf Scholz labelled the first-time issuing of common EU debt (e.g. the 750 bn Euro “Next Generation EU” rescue fund) as “the EU’s Hamilton moment”. Referring one more time to the US founding fathers’ approach to enhance unity via common debt may turn out as an appropriate means, from a German Chancellor’s point of view, to live up to a historical challenge without losing office at home.     

 

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