Will Germany blow its budget to tackle climate change?

The country’s coalition government considers taking on new debt to finance green initiatives.

Germany climate protests
Though renowned for fiscal discipline, Berlin is considering incurring new debt to finance a climate-protection package [File: Fabrizio Bensch/[Reuters]

Germany is considering ditching its long-cherished balanced budget policy to help finance a costly climate protection programme with new debt, a senior government official said.

The government of Chancellor Angela Merkel has managed to increase public spending without incurring new debt since 2014 thanks to an unusually long economic growth cycle.

But as the country’s borrowing costs sink to new lows almost daily – and as its economy cools – domestic and international calls to provide extra fiscal stimulus by running a small deficit again are becoming louder.

“The challenge now is how to shape such a fundamental shift in fiscal policy without opening the floodgates for the federal budget,” the official, who has knowledge of internal discussions in the finance ministry, told Reuters News Agency on condition of anonymity.

“Because once it is clear that new debt is no longer taboo, everyone raises a hand and wants more money.”

For that reason, Berlin would link and limit any new debt strictly to the climate protection package, which Merkel’s cabinet is expected to seal next month, the official said.

Merkel’s coalition government wants to cushion the effects of a planned exit from coal over the next two decades by pouring at least 40bn euros ($45bn) into affected regions and helping them manage the shift away from fossil fuels.

The coalition’s junior partner, the centre-left Social Democrats (SPD) and their Finance Minister Olaf Scholz, are also advocating introducing payouts to cushion the effects of a new carbon-emissions pricing system on low-income families.

‘Full force’

A finance ministry spokesman declined to comment.

But he pointed to a ministry statement saying the fight against climate change was a huge challenge that the government wanted to tackle with “full force”.

Coalition parties want to agree on the next steps at the climate cabinet’s next meeting, on September 20, and money is available to finance the measures, the ministry added in the statement.

The statement did not rule out the issuance of new debt after German media also reported that such a move was an option.

“The black zero (balanced budget) is no longer tenable,” a senior SPD member told Reuters. He pointed to additional costs of planned climate-protection measures that had already added up to more than 30bn euros ($34bn) until 2024.

“We need to invest more, especially into infrastructure and climate protection,” the senior SPD member said.

Under a constitutional amendment, Germany’s federal government is allowed to borrow new debt up to the equivalent of 0.35 percent of gross domestic product – equivalent to roughly five to 10 billion euros ($5.6bn to $11.2bn) per year.

Merkel and Scholz have repeatedly defended the goal of a balanced budget, arguing that it is important to reduce public debt in economic good times and not burden future generations with even more debt in light of Germany’s rapidly ageing society.

A source close to Merkel cautioned that the issue of new debt had not been on the agenda.

Eckhardt Rehberg and Hans Michelbach, senior lawmakers aligned with Merkel’s conservative group, both said they would stick to the goal of incurring no new debt.

‘No fetish’

While SPD budget lawmaker Johannes Kahrs also distanced himself from the idea, members of the party’s left wing called on Scholz to boost investments with new debt.

“The (balanced budget) should not be an end in itself or even a fetish,” SPD finance lawmaker Cansel Kiziltepe told Reuters.

“We should go for economically wise policy. And that means we need to invest in economic downturns.”

The move comes after yields turned negative even for 30-year German bonds, meaning investors pay the German state a premium to lend it money over a long period. The move also aligns with international efforts to limit the effects of global warming.

A United Nations report on the effects of climate change concluded on Thursday that global meat consumption must fall to curb global warming, to reduce growing strains on land and water and to improve food security, health and biodiversity.  

Source: Reuters