Bubblereport #5 – Always hanging on the mental flexibility of a hamster on a wheel – Mr. Linder as well as at the time Mr. Schäuble have in mind only one watchword: austerity! This time, however, it is not only the citizens of southern Europe who will suffer, but also the Germans. Indeed, to avoid their own masochistic rules many public expenses were done avoiding the rules. Now the German constitutional court had to recognize it, and Government will be in trouble. Who knows if the hamster will get off the wheel giving finally a chance to Europe not to be destroyed?

The German Constitutional Court's decision has sent shockwaves through the political landscape, reopening wounds within the coalition and triggering significant pro-cyclical austerity measures. Whichever way you analyse it, a substantial €60bn has been cut from the budget, with Handelsblatt estimating a net gap of €24bn for next year alone, equivalent to around 0.6% of GDP. This figure is net after tapping various funds, including unspent portions of previous allocations.

The debt brake, designed to prevent excessive spending, has effectively turned Germany into an economy dependent on slush funds. Governments have used various tactics to get around it, resorting to off-budget financing instruments. For example, by diverting €60 billion from the Covid emergency fund to the Climate Change Fund, the coalition of SPD, FDP and the Greens was able to implement a substantial investment and subsidy programme. However, this financial manoeuvre has now caused discord among the coalition partners, as the need to save €24 billion in one year has reopened debates on issues such as minimum income for children, subsidies for energy cost increases for large companies, support for the chip industry, housing programmes and new environmental initiatives.

The ongoing negotiations raise questions not only about the future of the coalition, but also about Germany's position as an industrial economy. There is a unanimous consensus in Germany to keep as many industrial sites in the country as possible, with no political party advocating de-industrialisation. The main divide is between environmentally conscious and traditional industries.

The initial perception that this ruling would have a negative impact on Finance Minister Christian Lindner may not be true. Lindner is expected to use his position to resist tax increases and push for spending cuts instead. With the budget already at the constitutionally mandated deficit limit, the coalition has little choice but to find fiscal savings through spending cuts. The substantial €24bn adjustment is likely to come from cutting SPD and Green projects, especially those led by the Green-led ministries of the economy and the environment.

Looking at the macroeconomic consequences, Germany's GDP has been declining and forecasts point to a further contraction in 2024. The pro-cyclical economic effects of the debt brake are evident as it forces the government to make savings in the 2024 budget, necessitating a further correction of 0.6 percentage points. Austerity seems to be making a comeback.

The debt brake is considered unsustainable for several reasons. Its pro-cyclical nature, combined with the lack of a sustainable investment rule, leads to a decline in the stock of net public assets. In addition, the imposition of a different fiscal rule on the EU's largest member state is seen as problematic, leading to economic divergence. The absence of slush funds may also have similar domestic political implications.