In late 2024, Germany’s political landscape was upended by the collapse of Chancellor Olaf Scholz’s “traffic light coalition”, comprising the Social Democrats (SPD), the Greens, and the market-oriented Free Democratic Party (FDP), one of our sister parties in ALDE. This coalition, which once promised a progressive agenda, fractured under mounting economic pressures, the war in Ukraine, ideological differences, and a ruling by the Federal Constitutional Court. The FDP’s commitment to fiscal discipline was central to this political upheaval, particularly the controversial Schuldenbremse—Germany’s debt brake.
The crisis started in November 2023 when the Court ruled that the government’s allocation of €60 billion to the so-called “Climate and Transformation Fund” (KTF is the German acronym) was unconstitutional. The KTF was originally set out in the coalition agreement and was designed to finance Germany’s energy transition and decarbonisation efforts. It was seen as a vital part of the coalition’s strategy to address climate change and modernise the ailing German economy.
The Court determined that transferring unspent COVID-19 relief funds to the KTF violated the debt brake provision in Germany’s Basic Law (Grundgesetz). This decision essentially invalidated the fund and created a significant shortfall in the government’s budget for critical infrastructure, energy transition projects, and social programs. The ruling was a severe setback to the policy agendas of the Greens and the SPD. For the FDP, it was a validation of their fiscal stance. Finance Minister Christian Lindner, leader of the FDP, seized upon the court’s decision to affirm the party’s commitment to fiscal responsibility, as it prevents inflation and is also fairer for younger generations who would have to pay off the debt. Lindner argued that the ruling reinforced the FDP’s argument that circumventing the debt brake undermined constitutional governance. However, it also led to a stalemate in coalition negotiations. The SPD and Greens sought new funding mechanisms to replace the invalidated KTF, while the FDP remained steadfast.
The debt brake (Schuldenbremse), introduced into Germany’s Basic Law in 2009, was designed to ensure fiscal responsibility by limiting the accumulation of national and regional government debt. The rule restricts annual structural deficits to 0.35% of GDP, except during emergencies (such as the COVID-19 pandemic). The FDP views the debt brake as essential for economic stability, with memories of the interwar hyperinflation still being strong in the country. However, critics argue that the debt brake, as it is currently worded, has become a constraint, preventing necessary investments to address long-term challenges like climate change and economic competitiveness.
The Greens, in particular, have called for reforms to allow greater public investment, citing the urgent need for decarbonisation. The Constitutional Court’s ruling reinforced the FDP’s hardline position and created an unbridgeable divide within the coalition. The Greens accused the FDP of ideological rigidity, while the SPD’s attempts at compromise failed to satisfy either side.
By late 2024, budget negotiations had reached an impasse. The FDP’s refusal to approve alternative financing mechanisms or temporary borrowing measures rendered the coalition unworkable. Faced with the prospect of governing without a viable budget, Chancellor Scholz sacked Lindner as finance minister and negotiated with the opposition Christian Democrats on a date for the next elections.
For our sister party, the FDP, the fallout from this crisis is a high-stakes gamble. While the party’s strict stance on the debt brake and fiscal discipline may appeal to many in its core voter base, it also risks alienating the broader electorate, who increasingly view the debt brake as an impediment to investment in the country’s ailing infrastructure. Critics, even within the FDP, accuse the party leadership of prioritising ideological purity over pragmatic governance—a perception that could prove costly in the 23rd February elections, as the FDP is currently polling at less than the 5% threshold required to gain seats in the Bundestag.
The fall of the Scholz government highlights the inherent challenges of multi-party coalitions. As voters prepare for new elections, debates about the future of the debt brake and Germany’s fiscal priorities are poised to dominate the campaign. It has yet to be seen whether the electorate will reward the FDP’s steadfastness or penalize them for perceived inflexibility.
The stakes for Germany—and also for relations with the UK—are substantial. The nation’s approach to navigating this political and economic crossroads will shape its (and Europe’s) future trajectory for years to come.
* Robert Harrison is Chair of the Liberal Democrat European Group and former Chair of the LibDems in Europe Local Party. He also holds German nationality and was a candidate for the European Parliament for the FDP in 2024.
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10 Comments
It seems to me that we are much closer to The German Greens than to The FDP.
“{Fiscal Responsibility} prevents inflation…….”
This is true for a country which has its own currency. However Germany doesn’t have that since it adopted the euro. Herr Lindner should really be meaning a tight fiscal policy. The FDP is effectively arguing that Germans should be poorer than they need be. They share a currency with others, and the EU ensures that obstacles to trade within the EU are virtually zero, it is interesting to ask what would happen if the German Federal govt ran a slightly looser fiscal policy by reducing tax rates and/or increasing spending.
Prices in a single market with a single currency can’t change that much. If German domestic demand was higher there would be an increase in imports and possibly a reduction in German exports. There needs to be this rebalancing of German trade to give the countries who owe hundreds of billions of euros to Germany an opportunity to repay their debts.
With the best will in the world no-one can repay debts if they don’t have the money to do it!
“…..and is also fairer for younger generations who would have to pay off the debt”
The future standard of living of young Germans will largely be determined by what they produce in the future. This won’t be adversely affected by present day debts just as the standard of living of baby boomers both in the UK and in Germany wasn’t adversely affected by high wartime debts.
Thank you for this, Robert: it is the best explanation of what has been happening in Germany since November that I have read or heard in any English-language media.
I think the FDP has gone seriously astray with its obsessive devotion to the Debt Brake.
Voters will punish them, in my view rightly.
Germany needs significantly higher government investment spending.
@Paul Barker: I agree that the German Greens are in their environmental policies much closer to the Liberal Democrats than the FDP, and indeed we have members of the LibDems who are also members of the German Green Party. However, the Greens also have some highly illiberal policies that the LibDems would not accept.
@Mohammed Amin: indeed I agree with you and have argued this case elsewhere. The current debt brake covers is inflexible. It covers not just capital expenditure but also day-to-day operational expenditure. Germany needs to figure out how to invest and where to obtain the funds for investment.
@Peter Martin: I agree with part of your analysis. However, one of the most important reasons that the standard of living of the baby boomers in the UK (or Germany) was that inflation in the 60s and 70s substantially reduced the real value of the debts and, in Germany’s case, currency reform in 1949 effectively wiped the slate clean. One of the cause for Germany’s current financial problems is the need to take over the responsibility of East Germany’s bad infrastructure and external debts.
@ Robert,
It’s interesting that you stood for the FDP. In my working days I used to have interesting conversations with German colleagues who were very intelligent when it came to engineering but struggled with an alternative point of view when it came to macroeconomics. I often used to say that the UK was quite happy to swap our paper IOUs for their generally excellent cars but that they really should find something better to expend their resources on. The whole point of exporting was to be able to import something else. There’s no need to export just for the sake of it.
The Germans didn’t handle the reunification process well. Inevitably debt levels had to rise. Of course when they did the orthodoxy insisted on an economic contraction which forced up unemployment levels. If there’s a job to be done why increase levels of unemployment?
https://www.ft.com/content/e257ed96-6b2c-11e4-be68-00144feabdc0
I am uncomfortable about the regular reference to the FDP as our “sister” party. I have never really understood where their values coincide with ours. I have the same reservation about VVD in the Netherlands – also a member of Liberal International and the Alliance of Liberal Democrats for Europe (ALDE).
Might the policy of the U S A to block the supply of cheaper/affordable Russian gas to Germany, and the rest of Europe, be a factor in Germany’s politico-social problems?
Ditto a dichotomy between politicians whose words and actions follow the policies of America and those who are closer to the wishes of so many of their fellow citizens?
https://michael-hudson.com/2025/01/as-good-as-it-gets/
Betting their economy on a continuing supply of cheap Russian gas was a mistake. It might just as easily have been the Russians who decided to cut it off.
I do not think that British Liberals would agree to the fiscal break that the FDP was determined to stick to.
However this does show how difficult the choices are becoming when you have a rising populist movement in the democratic world.
I will assume that the FDP are sincere in believing – rightly or wrongly – in sticking to the fiscal break. However since they were the only Coalition partner who believed that, they get the blame for bringing down the government. But not only that, they also risk with this new general election the likelihood of more populist MPs being elected. Are they prepared to go into coalition with a right wing government containing the AfD? I hope not.