Why Germany is Breaking Its Golden Rule

Did you know that, by law, the German government cannot run a deficit above .35% of overall GDP?

For perspective, US government spending was thirty-eight percent of GDP in 2017.

Germany’s balanced budget amendment helped it reach a record surplus in 2018. By contrast, America’s budget deficit – up 27% this year – will soon cross $1 trillion annually. The United States has not had a balanced budget in nearly twenty years.

Fiscal conservatism runs deep in Germany. It is one of the pillars of Germany’s famed Mittelstand, the small and medium-sized businesses that have underpinned the powerful German economy for generations.

Less spending comes at a cost. Many believe Germany’s fiscal approach has exasperated the Greek debt crisis and, by extension, triggered Brexit and the fundamental weakening of the EU. No one likes the wealthy, cheap friend.

Although Germans do not invest in maintaining global order or commercial expansion, they are about to break their country's golden rule. They may take on a large amount of new debt.

The reason is climate change.

Germany is going after climate change with "full force," according to a government official, by investing heavily in climate adaptation, mitigation, and resilience. It doesn't have much choice.

According to Munich Re AG, insurable losses from fires, floods, and storms doubled last year. By its estimates, climate-related losses topped $140 billion in 2018. Climate costs will skyrocket in the coming decades as the world becomes insufferably hot, crowded, and urban.

Germany has been leading on issues of climate change.

For starters, unlike Individual 1, German Chancellor Angela Merkel accepts climate science. As she told an international climate meeting in Berlin, “We know climate change isn’t a matter of faith. It’s a fact.”

Merkel could then work on concrete policy responses to a genuine, real-time threat. It has worked.

In 2018, 40% of German energy came from renewables. That's four times higher than America and nearly double the global average.

As it moves from fossil fuels to renewables, German industry is doubling down on innovation. In 2016, Germany's environmental technologies market accounted for 15% of GDP. These technologies will grow to almost 20% by 2019.

Further government action – and more private-sector investment – will bolster climate-focused initiatives in Berlin, Cologne, and other German cities.

Someone is going to own the climate market. Maybe she will do it with a stein in her hand.