What Europe needs to learn from the German debt brake fiasco

Xavier Sol — February 1, 2024

Financing the green transition and on-shoring a robust industrial base in Europe will require massive public and private investments. Germany's recent budget crisis forebodes a similar budget crisis at European level. It is high time to change track and develop an ambitious climate investment plan in Europe.

The German Supreme Court ruled in early November against the government’s transfer of a €60 billion emergency COVID-19 package to a fund backing projects such as electric vehicle battery production or microchip factories.

The basis for this ruling is the debt brake restricting federal budgetary deficit to a mere 0.35% of GDP, as enshrined since 2009 into the German constitution. Chancellor Scholz rightfully reacted that massive investments are more needed than ever to foster the green transition. Still, the government had to urgently suspend the debt brake and agree on a new 2024 budget including major cuts in spending programmes in favor of the green transition – from subsidies to electric vehicles to e-kerosene production.

Beyond the risk of failing to reach climate goals, alarm bells are ringing: if a major economy like Germany stops spending, an impending recession is in sight. As the Organisation for Economic Cooperation and Development (OECD) warned in late November, Berlin’s budget crisis could hamper the entire European economy in the coming years. 

Fast forward to 2026, imagine a world where all EU governments simultaneously scale back public investments. No more public funds go to grids, rail, digital technologies, electric vehicles, public services and buildings renovation. All of that stops at the same time.

This catastrophic scenario is not science-fiction. What is happening now in Germany could happen to Europe as a whole. The situation in Germany could foreshadow challenges that most European governments and populations will face in 2026, when the €700 billion funds from the Recovery and Resilience Facility will dry out.

In this pivotal year, vital resources on which governments rely to keep their economies afloat will fade away. 

Dark clouds are hanging over the future of the EU public finance architecture. The solidarity witnessed during the Covid-19 pandemic seems to be waning. Torn between frugal states and large economies playing their own national card in the cleantech race (France, Germany), European governments are not even able yet to agree on a support package to Ukraine, or on the minuscule €10 billion top-up under the STEP Platform to back an EU green industrial strategy. On 1st February, European heads of state are likely to agree on cutting down those €10 billion to €1.5 billion and re-directing them towards defence spending instead of cleantech.

But how to increase needed investments in the future when existing rules stand in the way? 

Ongoing discussions on fiscal rules – the so-called Stability and Growth Pact – are crucial. According to a study by the New Economics Foundation, perpetuating stringent fiscal discipline will exacerbate economic disparities among member states and impede collective climate objectives. The recent compromise struck by European governments implies that they will struggle to invest in their green transition. This calls for a paradigm shift. 

Instead of discouraging public investments, European rules should actually require governments to allocate a minimum percentage of their GDP to the green transition. If NATO requires its members to commit 2% of their GDP to defence, why can’t Europe require 2% – the bare minimum – to protect ourselves from the biggest long term threat: climate change?

This episode should serve as a wake-up call for Europe as a whole. The climate challenge is actually an investment challenge: investing now is the only way to secure a clean and safe future for our children and to avoid crippling climate costs down the line. After the hottest year in history and countless more climate “records” in 2023, what this moment needs more than anything is to speed up the transition.

Over the past four years, the European Green Deal has shown the direction of travel, through ambitious – yet insufficient – regulations. Now is the time to translate these commitments into action, ensuring not only environmental sustainability but also bolstering the sustainable competitiveness of Europe in the fierce global cleantech competition. 

This should start from a pan-European investment strategy that benefits people and the planet, while reinforcing the EU’s strategic autonomy. 

Establishing a long term European climate investment plan should be the top priority of the future European Commission. Joint EU funding, based on common debt emission, can be instrumental to channel much needed investments in the green transition and to alleviate the pressure on national coffers.

As we stand at a crossroads, the future EU economic governance should empower European governments to invest in the future, instead of imperiling the continent’s future. This make or break moment calls for seizing a major opportunity to pave the way for a greener, more sustainable Europe. This is what the upcoming EU elections should be about.

Related Articles

View All