Election Sunday is hardly behind us, and already the coalition negotiations between the possible governing parties are beginning. The Greens and the FDP met surprisingly quickly for a first round of exploratory talks; now both parties also want to exchange views with the SPD in the upcoming days. At first glance, the parties seem to have a number of differences, especially in terms of financial policy, as some of them seem ever more committed to traditional financial policy narratives than their fellow campaigners for the coalition bloc. How can all this go together? What, for example, is the next step with regards to the debt brake? How can climate investments be reconciled with strict debt rules? And how should the fiscal policy framework for the EU be shaped?
Shahin Vallée, former advisor to Emmanuel Macron, Nicola Brandt from the OECD, Philippa Sigl-Glöckner, Director of Dezernat Zukunft, and Guntram Wolff from Bruegel discussed this at a panel. Janek Steitz of Agora Energiewende also presented recent estimates from a study commissioned by the forum on the need for public financing to achieve the climate targets. The event was part of a week of debates on fiscal matters, and was organized by the Forum together with the New Economics Foundation.
The key takeaways
The fiscal debate is given additional weight not least by the accelerating climate crisis, which will require unprecedented levels of investment to combat. The level of this necessary public funding will undoubtedly influence the party debate happening right now among potential coalition parties in Germany. Janek Steitz of Agora Energiewende presented estimates from a study commissioned by the Forum New Economy on the climate investments that will be needed in the future to meet climate targets. In it, the authors calculate a public financing requirement of 460 billion euros in the next 10 years alone – a tripling of the German government’s current planning targets. Reforms, said Janek Steitz, will therefore be essential to increase the urgently needed fiscal space. To this end, he mentioned two possible options, a ‘green’ golden rule that would allow climate investments even under the debt brake, or independent investment agencies that the state could use to invest in public infrastructure in particular, such as the rail network.
Nicola Brandt of the OECD added that it is not only the level of investment that is crucial, but also ensuring that investment activities are done effectively, especially at the municipal level, where problems have repeatedly arisen in the past. Nicola Brandt therefore proposed the establishment of an independent investment agency that could assist the government in creating a 10-20 year investment plan. This would allow for a clearer vision, planning certainty and greater transparency, thus increasing the quality of investment projects.
Philippa Sigl-Glöckner emphasized in particular the unusual negotiation situation in which the individual parties currently find themselves. The debt brake, which was suspended due to the Corona crisis, gives the parties virtually unlimited fiscal leeway until the end of 2022, after which a return to the debt brake in 2023 threatens to cause a steep financial cliff. This could potentially be mitigated by allowing unused financial resources from 2021 and 2022 to be carried forward, thus increasing the leeway even if the debt brake were to be invoked again in its old form. Otherwise, the financial leeway for the government could be very small. Overall, she considers a fundamental reform of the debt brake to be unlikely. It would be more promising to create additional financial leeway by fully utilizing the labor market. Up to an additional 25 billion euros per year could be mobilized in the areas of female employment, part-time work and the low-wage sector, according to Sigl-Glöckner.
And at the European level? Here, Guntram Wolff from Bruegel sees fiscal consolidation as a primary challenge, which he believes will likely lead to a decline in public investment, particularly in key areas such as research and development. This, he says, runs counter to what is actually a necessary strengthening of public investment at the European level, especially in greener energy and transportation systems. While Germany has solid fiscal capacity for a decarbonization of the economy, the risk is higher in countries with lower fiscal room, where green public investments will likely only be possible under significant trade-offs, he said. This is particularly the case if the current financial inflow from the European Recovery Fund dries up after 2023, he said.
Shahin Vallée of DGAP concluded by calling for more courage and creativity in the fiscal debate, saying that it should not just be about thinking about loopholes in the existing rulebooks, but debating a fundamental change in the rules, including a constitutional amendment. This has already been done several times in the past, he said, for example to allow for higher financial allocations from the federal government to the municipal level. The problem, he said, is not so much the political feasibility of changing the rules, but the lack of an intellectual consensus on whether abolishing the strict debt rules is desirable. The German debate would also be decisive at the European level.