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Why the German Finance Ministry Matters—And Who Should (Not) Lead It.

Image depicts Christian Lindner. Image via Heinrich-Böll-Stiftung/Flickr

For most of Angela Merkel’s 16 years as chancellor, the leading German philosophy on financial and budgetary matters was simple. So simple, in fact, that Merkel often invoked the example of a homely Swabian housewife (schwäbische Hausfrau) to clarify her position. The Hausfrau, who spends frugally and rarely buys on credit, lives within their means—something Merkel and other German conservatives alike wish(ed) to duplicate for their country on both a national and European level.

Yet while the German housewife association (Deutscher Hausfrauenbund) remains an important resource for learning practical household skills and gaining certain qualifications, its application to the German financial system is outdated and should be avoided—particularly in the midst of the Covid-19 pandemic. Therefore, seeing that one of the primary contenders for the office of finance minister—the Free Democratic Party’s (FDP) Christian Lindner—has recognized value in the Swabian housewife principle, and intends to use similar principles of fiscal orthodoxy in the post-pandemic era, it is of the utmost importance for Germany and Europe’s sake that his promotion is prevented. Simply put, Christian Linder should not lead the ministry which has massive influence on German government spending and whose policy decisions often have ramifications far beyond Germany.

 According to the ministry’s website, “[t]he Finance Minister manages the Finance Ministry in line with the policy course set by the Federal Chancellor. The Finance Minister is the member of government responsible for all aspects of Germany’s budgetary, fiscal and tax policy.” The ministry’s power is also not limited to domestic policy, and its influence in European politics has led to it being labelled as the “most important among all German federal ministries.” The European Central Bank (ECB) is headquartered in Frankfurt, the German Bundesbank is the “EU’s most powerful national central bank,” and, despite the uncertainty of the post-Merkel era, Germany will maintain “its undisputed role as the financial anchor of the euro zone,” according to Holger Schmiedling, chief economist at Berenberg Bank. Olaf Scholz of the Social Democratic Party (SPD), the current finance minister, was given the title of Vice-Chancellor within the last government under Merkel and, following the election results, will likely be Germany’s first chancellor of the post-Merkel era. All this points to the ministry’s importance, heightening the stakes for the selection of Scholz’s successor.

Lindner’s FDP is typically described as pro-business. More specifically, the party favors private businesses by supporting tax cuts and shrinking German bureaucracy, while opposing European fiscal integration. Lindner’s competitor for the Finance Ministry, Robert Habeck—co-party leader of the German Greens—contrastingly favors debt-funded public investment to rebuild decaying infrastructure and tackle climate change. Of particular importance is the German “debt brake,” introduced into the German Basic Law in 2009, which dictates that “[a]t the Federal level, structural deficits [are] restricted to a tight maximum of 0.35% of GDP.” The German government put the debt brake on a temporary hold in response to the coronavirus pandemic, but the FDP (specifically Linder) has vowed to take a hard line on debt and return to the “brake” sooner rather than later. In contrast, once more, Habeck supports a relaxation of the debt brake to “invest more in restructuring the German economy, the better to meet the challenges of climate and technological change.”

Sound decision-making in relation to budgetary matters and spending is important regardless of who is at the helm. Despite Lindner’s doubts in the ability of a Green-led finance ministry, there are three key insights that point to why Robert Habeck’s approach is both sound and contemporary, and why Christian Lindner’s hands on the purse strings could create serious problems for the German and European political economy.

First, specific areas of German life, such as infrastructure, have crumbled in part due to “a vicious circle of declining investment, slumping tax revenue and a shrinking population.” Regions like the industrial Ruhr Valley benefited from a federal bailout that was only possible due to the suspension of the debt brake, but will likely be crunched if there is a return to pre-pandemic fiscal orthodoxy in the coming year or two. Moreover, Linder’s position on favoring private over public investment and opposing tax increases checks two of the boxes that contributed to this vicious circle. In the past, austerity and fiscal orthodoxy have perpetuated inequality and dismantled opportunities for equitable growth following times of crisis, such as the Great Recession, and the same lessons must be taken into account coming out of the coronavirus pandemic. 

Second, Lindner as finance minister would significantly test the internal cohesion of the SPD, under the leadership of a Chancellor Scholz. Despite being by-far the most popular figure from the recent election winners, Scholz’s outlook on fiscal policy is not supported by most within his party. Indeed, Scholz’s more conservative approach to spending matters (including a desire to return to the debt brake) contributed to his selection to serve in Merkel’s cabinet. Were the Greens, FDP, and SPD to enter the “Traffic Light” coalition, named after their Green, Yellow, and Red party colors, many of Lindner’s financial decisions would be met with distaste from most of the SPD and the Greens alike. This not only alienates the SPD on financial issues, but also threatens the integrity of what will be Germany’s first three-party coalition. 

Finally, and most importantly, as Finance Minister, Lindner would be disastrous for the European political economy. If Germany were to once more throw its support behind the EU’s smaller, conservative bloc and push for the aforementioned return to pre-pandemic fiscal orthodoxy, the stage would be set for a “disastrous clash of the type that resulted in the eurozone crisis,” as the respective debts of France, Italy, and Belgium—among others—all exceed 100 percent of their GDPs. Unsurprisingly, Italy and France are both in favor of “loosening the EU’s fiscal rules.” Germany should not blindly follow its counterparts on this approach, but it should recognize the ways in which European finance has changed throughout the course of the pandemic. A return to budget orthodoxy and austerity would imply a belief that such change never occurred. The EU has emerged out of the pandemic as a closer unit than when the virus first began to spread. Fiscal decisions under Lindner would inevitably reverse this.

The solution to these problems is not as simple as a permanent removal of the debt brake. With a two-thirds majority in both houses of the German legislature required to even do so, the mere possibility of that happening is remarkably low. Although Die Linke (The Left) Party supports scrapping the debt brake, the Greens primarily support a loosening, not dismantling, of it, and the SPD, CDU, and FDP would all oppose any measure to rid it completely. Furthermore, the brake has not been exclusively negative, reigning unnecessary spending in. The peculiarity of pandemic economic recovery coupled with the urgency for addressing climate change, infrastructure, and many other issues, however, requires a far greater degree of fiscal flexibility than the traditional debt break will allow. As Finance Minister, Robert Habeck would be much more likely to agree, as the Greens have already proposed a “golden rule” to the debt brake which would allow a “debt-funded ten-year 500bn Euro investment programme, focused on climate and digital infrastructure.”

There is one caveat to the plea for German finances to be in the hands of someone not named Lindner. The FDP and Greens will be critical in forming Germany’s next government—and both parties will have demands that need to be met. If Lindner threatens to walk out of coalition negotiations (as he did in 2017, preventing a “Jamaica” partnership between the CDU, Greens, and FDP) over not being given the position of finance minister—or if the FDP insists on leading the Environment Ministry should Habeck become finance minister—then there are few scenarios where Lindner’s wish would not be met. If that becomes reality, one can only hope that Chancellor Olaf Scholz has kept his old Finance Ministry contacts in case Linder tilts the sails in the wrong direction. 

Christian Lindner’s positions on fiscal matters are oversimplified and outdated and pose a grave danger for the economic future of Germany and Europe. Despite his wishes, Lindner should not be put in charge of such a vital ministry to the German and European economy. Even Schwabian Housewives make exceptions to their principles of frugality, such as going on vacation. Public investments in climate and infrastructure are far from a trip to Mallorca, but are nonetheless necessities that should not be given to the FDP, through Christian Lindner, to decide on for the next four years.