Is the “Debt Brake” behind Germany’s successful fiscal consolidation?

Abstract

The German general government recorded a surplus for the fourth year in a row in 2017. The fast consolidation after the Great Recession coincided with the transition period for the full introduction of the federal debt brake. At the same time Germany’s economy is performing better than those of many other countries. Therefore it is nearly impossible to overrate the symbolic power of the debt brake as a seeming success story. We scrutinise this story by carrying out a comparative analysis of the “structural” consolidation of public finances in Germany for the period from 1991 until 2017, showing that the German debt brake is not the cause of the successful budget consolidation since 2010. The improvement of the general government finances since 2010 was smaller than in previous consolidation phases and was strongly supported by both a favourable macroeconomic environment and one-off effects. Finally, without the blessing of a strong upswing, Germany would hardly have become the fiscal role model for Europe, and the German debt brake would not have become the blueprint for the European Fiscal Compact.