Germany, for many years the economic locomotive of Europe, is passing through a zone of turbulence. The once vaunted “golden rule of budgeting” is now being called into question with calls for its abolition.

Has Germany again become the patient of “Europe”? “The situation is extremely bad,” German Economy Minister Robert Habeck admitted, as the country cut its growth forecast for 2024 to 0.2 percent from an initial 1.3 percent.

This is a serious blow to Europe’s largest economy, whose GDP fell by 0.3% last year. And the forecast for the coming years is not more optimistic, with growth averaging 0.5% per year until 2028.

In 2009, to curb the accumulation of new debts, a special paragraph was included in the German Constitution

“The truth is that Germany suffers from structural problems that have accumulated over many years,” explained Robert Habeck, who calls for “acceleration of reforms.” Indeed, “under Merkel, there was a significant lack of investment due to the budgetary golden rule,” explains economist Anne-Sophie Alsif.

In 2009, to curb the accumulation of new debts, a special paragraph was included in the German Constitution. Under this amendment, known as debt relief, the federal government can pay off new debt each year in an amount equivalent to 0.35% of gross domestic product.

But Germany needs to invest billions of euros to tackle climate change and transform its industry, which has been hit by high energy prices and competition from the US and China.

“If these investments are not made now, the country risks deindustrialization and thus a significant loss of prosperity in the future,” German economist Sebastian Dullien, president of Berlin’s IMK Institute for Macroeconomic Policy, told the group separately. by Funke Press.

With some of the worst economic performance in the eurozone, Germany ended 2023 with a GDP contraction of 0.3%, due to a slowdown in its industry.

The situation worsened in November, after the Constitutional Court ruled that the transfer of approximately 60 billion euros from a fund intended to fight the Covid-19 pandemic to a special fund for climate change investments was unconstitutional.

In this context, the “Council of Sages”, five economists who advise the Berlin government on economic policy, also called for reform of the debt brake the other day. “As it stands, the debt brake is tighter than necessary to maintain debt acceptability and unduly restricts the fiscal space for future spending,” the five sages say. Experts propose, in particular, a relaxation of up to 0.50% of the new debt ceiling, if the public debt does not exceed the level of 90% of GDP. Currently, Germany’s public debt is equivalent to 65.1% of GDP.

But all these calls seem to have no echo. Germany’s finance minister, the liberal Christian Lindner, wants to keep the current government, in contrast to the coalition partners.

Slowing demand

The Mittelstand, a network of export-oriented small and medium-sized companies that is one of the strengths of the German economy, is also suffering from economic difficulties. “They have borne the brunt of the slowdown in global demand, especially from China, as well as rising interest rates,” explains one economist.

Rising energy costs have also hit Germany’s industry hard, which is based on energy-intensive segments such as cars and the chemical industry. Prices have soared in the country, which is heavily dependent on Russian gas imports after ditching nuclear power under Angela Merkel.

Added to this is a labor shortage against the backdrop of a declining birth rate and an aging population. German companies also say they do not receive as many subsidies as their American competitors.