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Economist
12-06-2025
- Business
- Economist
Can Germany reinvent its economy?
Germany was once the economic powerhouse of Europe. But since 2019 its economy has barely grown. The country is now under new leadership—but is Friedrich Merz the man to pull Germany out of its perma-slump? Hosts: Ethan Wu and Mike Bird. Guests: The Economist 's Christian Odendahl; Monika Schnitzer, chair of the German Council of Economic Experts; and Philippa Sigl-Glöckner, founder of Dezernat Zukunft, a macro-finance think tank. Listen to what matters most, from global politics and business to science and technology— subscribe to Economist Podcasts+.
Local Germany
16-02-2025
- Business
- Local Germany
Germany's 'debt brake' at centre of economic debate
The rule, which strictly limits government borrowing, now finds itself at the centre of debate over Europe's ailing top economy, a key election battleground. Critics blame it for years of chronic underinvestment that has caused infrastructure to deteriorate, kept defence spending low and hit education standards. Its defenders insist it has helped keep the country's finances stable. Here are some questions and answers about the controversial rule: What is the debt brake? The constitutionally enshrined measure prevents the central government from running a deficit of more than 0.35 percent of annual GDP, except in emergencies. It was introduced in 2009 by the government of then-chancellor Angela Merkel, at a time of debate about national debt levels during the global financial crisis. More than two-thirds of the upper and lower houses of parliament voted for the rule, as it required a change to the constitution. It came into force for the federal government in 2016. It was suspended for four years to permit extra spending during the coronavirus pandemic and then the energy crisis triggered by Russia's war in Ukraine, but it came back into force in 2024. What do its supporters say? They say it has helped keep spending levels under control in Europe's top economy -- Germany's public debt is around 60 percent of GDP compared to around 100 percent or more for most other G7 countries. One of its key political backers is the pro-business Free Democratic Party, part of Scholz's coalition. It argues that the brake ensures that future generations are not burdened with the debts taken on by their forebears. "Every euro of debt taken on today will have to be repaid by future generations," the party says. But the refusal of party leader Christian Lindner to countenance any easing of the rule when he was finance minister under Scholz left him at loggerheads with his coalition partners, and contributed to the government's implosion. What about criticism? Critics blame the brake for preventing investment in areas such as defence, as US President Donald Trump pressures Europe to boost funding, and for infrastructure problems, from late trains to patchy internet. Other challenges, such as decarbonising the economy, also need vast public outlays. Meeting them will require an additional 782 billion euros ($811 billion) of government spending between now and 2030, according to the Dezernat Zukunft think tank. "It is almost certain (that the country) will take on more debt in the future for public infrastructure and defence," said Klaus Baader, the chief economist with France's Societe Generale bank. The government created off-budget funds for spending in certain areas such as defence and climate, drawing accusations they had engaged in accounting trickery to circumvent the rules. The constitutional court ruled in November that the government had indeed broken the debt rules, specifically over a manoeuvre where they transferred money from a coronavirus support fund into climate change investments. The ruling blew a hole in the coalition's budget, ratcheting up tensions over the brake. What happens after the election? Leader of the centre-right opposition and favourite to be the next chancellor, Friedrich Merz, has sent mixed signals about the brake. His CDU party's position is that it should remain but he has occasionally indicated an openness to reforming it in certain circumstances. In a recent television debate with centre-left leader Scholz, he gave vague answers when asked about the subject: "One can discuss anything, but certainly not at first." Scholz's SPD -- whom some speculate could end up in coalition with the CDU -- backs loosening the strict rules to boost investment, a position shared by the Greens. Much will however depend on the shape of the new ruling coalition after the February 23 election. If fringe parties, such as the far-right AfD and far-left BSW do well, it could inhibit the ability of the mainstream parties to push reform of the brake through parliament, as that would require a two-thirds majority in both chambers.
