German chemical industry calls for fiscal discipline ahead of election

LONDON (ICIS)–German chemical producers’ trade group VCI wants the country’s new government, to be formed after early elections on 23 February, to maintain the so-called “debt brake” (Schuldenbremse).

• Debt brake ensures fiscal discipline
• Economy weak, but fiscal position strong
• Reform may drive investments to boost economy

A dispute over government spending priorities contributed to the collapse of the coalition government under Chancellor Olaf Scholz in November.

Under the constitutionally enshrined fiscal rule, structural budget deficits cannot exceed 0.35% of GDP. The rule can be suspended in times of emergency, as it was during the pandemic and the start of the Ukraine war.

In the current election campaign, political parties are now debating whether to retain, ditch, or reform the fiscal rule.

Critics of the Schuldenbremse say that it hinders public investments, needed to help revive the country’s economy, which has been weak since 2018. GDP shrank in both 2024 and 2023.

However, VCI’s position is clear: The Schuldenbremse has proven itself as it managed to halt the trend of growing debt/GDP ratios, the group said in a position paper this week.

FISCAL DISCIPLINE
The fiscal rule, anchored in the constitution, ensured that spending does not exceed means and that the current generation does not live at the expense of future ones, VCI said.

As a result, Germany has a relatively low level of debt and low debt service obligations – giving it the financial capacity to react in times of crisis, whereas higher-indebted EU countries needed to rely on the solidarity of their neighbors or eurobonds, the group said.

VCI acknowledged that the Schuldenbremse is being questioned in light of the current “massive economic downturn and the immense investment backlog,” and it said that the rule was “not perfect”.

However, the country’s current problems reflected the “political deficits” of the past, when government neglected necessary investments in infrastructure, security, education, and research and development, it said.

REFORM
VCI would not rule out a “moderate reform” of the Schuldenbremse, allowing for temporarily higher deficits, as long as the debt-to-GDP ratio remains below 60%, it said.

Reforming the debt brake could buy time until investments and reforms start to pay off,  said VCI chief economist Henrik Meincke.

The government’s priority, however, must be “to clearly prioritize expenses and focus on investments”, he said.

Meincke urged a “fundamental course correction” in industrial policy, with a focus on the government’s core tasks, a sharp reduction in bureaucracy, and “tax revenue invested in security, education and infrastructure, as a priority”.

Any reform of the debt brake must not be “a quick fix” as that would not solve the country’s structural problems, the economist said.

Analysts at ING said the current political debate about public finances in Germany may create the impression that the country was close to bankruptcy, which was not the case at all.

German government debt had stabilized slightly above 60% of GDP and was expected to stay there until 2026, analysts said.

“Germany has by far the lowest government debt ratio of the larger eurozone countries,” they added.

Thumbnail photo of Friedrich Merz, head of the opposition conservative Christian Democratic Union (CDU), which leads in opinion polls. The CDU favors retaining the Schuldenbremse, but Merz has said he may be open to discussions about reforming it. Photo source: CDU