Europe News

Germany amends constitution to bar deficits by 2020

Jun 12, 2009, 10:58 GMT

Berlin - A ban on government deficits in Germany passed its last legislative hurdle Friday, with the upper house or Bundesrat adopting the constitutional amendment which comes with a list exceptions.

Three of the 16 states represented in the chamber opposed the change Friday, but lacked the votes to block the amendment. On May 29, the amendment had been adopted in a 418-109 vote by the Bundestag lower house.

When governments spend more than they receive in revenue, the difference, known as a deficit, is obtained by borrowing money from banks or from the general public by way of government bonds.

It will mainly be the states which will be constrained by the amendment, which forbids increases in net borrowing from the year 2020 onwards, meaning the states may only take out new loans to the extent that they retire old debt.

After 2016, the federal government will have leeway in normal times to increase annual net federal borrowing by only 0.35 per cent of Germany's gross domestic product (GDP), or about 8 billion euros (11 billion dollars) in today's terms.

It will have powers to largely sidestep that limit by declaring an emergency. At present, Germany is soaking up new loans at a rate of 330 billion euros annually to counter the effects of the world recession.

Extra borrowing will be allowed during future recessions, but governments will be required to reduce their debt again in good times.

Leftist critics said the constitutional change would limit the power of government to aid the poor, whereas conservative critics said the exemptions were so broad that the habit of deficit spending and the constant increase in public debt would continue.

The Left Party has said it will explore a court challenge to the amendment, which will take effect in 2011 and still requires signature by the president and publication in the government gazette.

The amendment was a policy of Chancellor Angela Merkel's Christian Democrat and Social Democrat coalition and has been under debate for the past two years. It was agreed partly as a trade-off for the current flurry of borrowing.

It was opposed Friday by the states of Berlin, Mecklenburg-West Pomerania and Schleswig-Holstein, which said the amendment illegally clipped the powers of state legislatures.

Germany's constitution already contains constraints on borrowing, but in the space of 40 years, net federal debt has ballooned to nearly 1.6 trillion euros.

Germany's federal and state governments are forecast to soon have total debts equivalent to 70 per cent of Germany's gross domestic product (GDP), a figure that roughly represents annual income.

The next move will be a national aid plan for the most indebted states to help them reduce debt.