Germany is blocking billions of euros in investment domestically and across the EU because of the country’s commitment to low budget deficits. This “fiscal discipline” is undermining economic growth and decarbonization goals across the continent.

German Chancellor Olaf Scholz and European Central Bank president Christine Lagarde celebrate the anniversary of the European Central Bank’s founding, May 24, 2023. (Thomas Lohnes / Getty Images)

The late Tony Benn once observed that there always seems to be money for war, but never enough to meet people’s basic needs. “If we can find the money to kill people,” he argued, “we can find the money to help people.”

Recent events in the European Union seem to be proving him right. The German government recently rejected a request for a €100 billion top up to the EU’s annual budget, half of which was earmarked for Ukraine. Berlin has approved the request for extra funding for Ukraine but rejected the rest.

This move comes in the wake of a decision by the German Constitutional Court to cancel €60 billion worth of planned investment — including several green energy projects designed to support decarbonization. The court determined that extra spending was unconstitutional, as the government had already breached the limits imposed by the “debt brake.”

Angela Merkel introduced the debt brake into the German constitution in the wake of the financial crisis, limiting the country’s structural budget deficit to no more than 0.35 percent of GDP. The results of this fiscal tightening have been disastrous for Germany, which is suffering from a chronic lack of public investment.

Germany has several Northern European allies that support its rigid approach to public finances, and together this group has embedded a commitment to austerity within the European Union. As we saw during the debt crisis of 2010, countries that fail to abide by this commitment — often due to circumstances outside their control — are ruthlessly punished.

But this approach is now being questioned, for a number of reasons. First, investment in decarbonization is now a question of national security for Germany and other EU countries.

There is, of course, the long-term threat to security associated with a warming world. The increasing likelihood of geopolitical conflict and rising flows of climate refugees will become significant problems for the EU in the coming years.

But there is also the more immediate challenge of reducing the bloc’s dependence upon Russian energy. The German state’s reliance on Russian gas significantly undermines the country’s condemnation of Vladimir Putin’s invasion of Ukraine. Providing money to Ukraine while failing to invest in clean energy is a completely contradictory policy stance.

Second, more than a decade of low investment is now seriously taking its toll on the German economy. There is a widespread consensus that the state has drastically underinvested in infrastructure in recent years — particularly transport infrastructure.

Even the staunchly neoliberal journal the Economist has criticized the German government for the chronic lack of investment, stating that the country “urgently” needs to invest in new infrastructure.

Finally, if fiscal austerity is unsustainable within Germany, it has been utterly disastrous for the rest of Europe.

In the wake of the UK’s decision to leave the European Union, some wiser members of the bloc have realized that the union cannot survive if it continues to generate massive economic inequalities between regions.

The UK is one of the most regionally unequal countries in Europe. The “left behind” places that failed to benefit from the country’s rapid integration with the global economy, of which membership of the European Union was a central component, were much more likely to vote leave.

And this same pattern holds in many other countries, particularly in Southern Europe. Countries like Italy and Greece not only have significant regional inequalities within their domestic economies; they are plagued by ongoing divergences in productivity between Northern and Southern Europe.

These divergences have, as we have seen, become self-reinforcing over time as investment flows into more productive economies and debt servicing costs rise for less productive ones. Without mission-oriented public investment in the poorer parts of the European Union, political support for the project will continue to wane.

The changing political context in Germany encouraged many to believe that a new consensus on public investment may be on the horizon. During the pandemic, the government made use of emergency measures to increase spending to respond to the disaster.

But there is now pressure to return to the old normal of fiscal austerity. No party within Germany’s ruling coalition — composed of Chancellor Olaf Scholz’s center-left Social Democratic Party, the Greens, and the center-right Free Democratic Party (FDP) — wants to be depicted as the party of fiscal irresponsibility, even if that means continuing down the ruinous path of underinvestment that has created so many economic and political problems up to now.

In the wake of the court ruling, members of the coalition continue to debate how to proceed. Some are arguing for a change in the constitution to amend, or even remove, the debt brake. But the FDP is particularly firm in its refusal to countenance long-term increases in spending to tackle the underinvestment problem.

These same tensions are visible at the European level. The COVID-era European Green Deal — billed as a radical spending package to decarbonize and reduce intra-European inequality — was so watered down that it failed to have much of an impact. And now Germany’s refusal to allow for increased spending to meet higher debt repayments is likely to force further budget cuts.

To put it another way, Germany is cutting off its nose to spite its face. Its political class is so obstinate and committed to the policy of fiscal discipline that it is continuing along its chosen path, even though it is severely damaging the nation’s own interests.

Up to now, senior EU figures could castigate the UK for cutting off its nose to spite its face by leaving the European Union. But as Brexit falls off the political agenda, it has become easier to see all the ways in which Europeans are harming their own long-term interests with a rigid commitment to fiscal discipline.

Ultimately, this rigidity could lead to many more Brexits in the decades to come.

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