Global Agenda

German hawks’ risky melancholy: Do budget cuts threaten the domestic stability of Germany?

Raul Bertoldini

In recent weeks, a series of events has captured headlines in Germany and beyond. Among these, the introduction of a new budget proposal by the German government in the first week of July stands out. This proposal includes a significant cut of 30 billion euros. This is in line with the country’s fiscal policy, which traditionally limits annual debt to a small fraction of the GDP. However, the onset of the COVID and Ukraine crises necessitated the temporary suspension of this brake. While the draft is like to be subject to changes in the following months, one thing that appears certain is that Berlin’s strategy to restore order in public spending incorporates diminished funding across multiple sectors, from transportation (12 billion euro forecasted for 2024-2027, one-fourth of what is needed according to an estimate by Deutsche Bahn, German railway State operator) to education and paternity leave benefits, which will see a cut in half of the maximum annual income of the families eligible for the program, from euro 300 000 to 150 000.  A notable exception is the area of military spending, where Berlin has committed to both itself and its allies. The only ministry not facing cuts is defence, as Germany plans in 2024 to comply with the NATO target of 2% of GDP devoted to the military, with 51.8 billion euros budgeted for defence and 19.2 billion in extra-budgetary funds for the armed forces.

While this news carries significant weight, it coincides with other evolving dynamics. The combination of these elements could have particularly explosive implications for a nation that has always prioritized stability as its hallmark. Furthermore, delving deeper into the economic aspect, it is noteworthy that Germany, typically regarded as the driving force behind Europe’s economy, is technically experiencing a recession, as evidenced by negative growth in the final quarter of 2022 and the first quarter of 2023. This occurrence and its implications for broader issues within its economy have sparked intense debates among economists in recent weeks, with some seeing it as a temporary slump while others underline potential structural problems that could affect the entire EU. Undoubtedly, this contraction of the country’s GDP will have tangible effects on public opinion and German citizens, both from a morale and purchasing power standpoint. Paradoxically, the decline in population confidence regarding the future and the subsequent decrease in household expenditures are considered primary drivers of the recession.

In another noteworthy development, the summer of 2023 marks a significant turning point wherein the far-right party AfD (Alternative für Deutschland) has achieved the second position in nationwide polls for the first time. While the party’s support has ostensibly been bolstered by the repercussions of the pandemic and shifts in the global landscape, concerns regarding immigration and general dissatisfaction with Berlin’s institutions appear to remain the primary determinants influencing the voting preferences of its supporters.

Germany is in the midst of significant changes. Historic events like the pandemic and Russia’s invasion of Ukraine have coincided with the end of the Merkel era. This era was characterized by a certain degree of admiration or even envy for Berlin’s prosperity, stability, and financial acumen, occasionally reaching levels that even Germans themselves found surprising. Therefore, some politicians have taken pride in and showcased this governing approach, encouraging other countries to adopt Germany as a model and celebrating the so-called 0 deficit rule with 0-themed parties, cakes, and group pictures of the finance ministry’s employees.

However, in these dynamic times, this proud and almost nostalgic attachment to the past threatens to backfire, risking not only the downfall of these public figures but also of national stability as a whole. Many of the previous economic system’s funding pillars are undergoing critical challenges, with the stop of cheap energy flows from Russia and a slowdown of exports. Elements Moreover, when the first government post-Merkel assumed power, the majority held by the SPD (Sozialdemokratische Partei Deutschlands) likely instilled hope in many Germans for a shift in governance after more than a decade of center-right rule.

However, since that time, a growing chorus of criticism has emerged, targeting both the Chancellor and the policies that have been implemented. It is important to note that the SPD does not govern alone but rather as part of the coalition known as the “Ampel” (Traffic Light) coalition, which comprises the Greens and the Liberals. Notably, the author of the aforementioned federal budget, Finance Minister Lindner, hails from the latter party. Nevertheless, it appears paradoxical that a government led by social democrats would enact a 30 billion reduction in the budget, the most significant in a decade. While not all members of the coalition are content with these measures, it is unlikely that the plans will undergo significant changes in the near future.

The urgency of these cuts is arguable (even after these emergency years, the GDP/deficit ratio stands at app. 68%; in 2012, it was around 80%), as has always been Germany’s so-called “hawkish” and rigorous approach to public finances. What is more apparent is that these measures risk stoking tensions in a country already wrestling with changes it has not confronted in over a decade. Increased friction within the ruling coalition will likely coincide with escalating frustration from parts of the German population, who will feel the country’s slowdown effects more acutely in the short to mid-term. Berlin’s political class must be responsive to this frustration, striving to balance long-term governance with citizen sentiments.

Lacking this sensitivity, the “Zeitenwende” touted by Scholz in his speeches may become overly fixated on military rebuilding and the revision of German security, consequently neglecting other pivotal changes occurring within the country. To effectively assume a renewed leadership role within Europe, Berlin should prioritize domestic stability. Failing to do so could jeopardize any broader ambitions, undermining both Germany’s and Europe’s benefit.

Photo credit: NATO North Atlantic Treaty Organization

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