Germany’s ruling political alliance, the Conservative CDU/CSU bloc that won the German election last month, and the Social Democratic Party (SPD) have reached an in-principle agreement with the Greens Party on significantly increasing state borrowing.
“Germany is back,” declared German Chancellor-in-waiting Friedrich Merz on Friday (March 14) following marathon talks with the Green Party. The proposed policy comes before a parliamentary vote next week and breaks from a long-standing focus on containing budget deficits in Germany through the “debt brake”. Here is what to know.
What is the debt brake?
The Angela Merkel-led government introduced the debt brake in 2009 for multiple reasons. First, the government wanted to limit its borrowings amid the global financial crisis. Additionally, Germany had signed the European Union’s 1992 Maastricht Treaty, which aimed at greater economic integration among member states and set some rules on public spending.
In the late 2000s, the country breached the 60 percent debt-to-GDP ratio fixed under the treaty. It had already spent heavily on reconstructing East Germany following reunification in the 1990s, and the loss of tax revenue during the recession compounded the problem.
In its current form, the debt brake measure ensures that the federal government and all 16 states balance their books. According to Paragraph 3 of Article 109 of the Basic Law, “the budgets of the Federation and the Länder (the states) shall, in principle, be balanced without revenue from credits.” Effectively, the government gets to spend only as much money it earns through taxes and levies. This requirement is known as the “debt brake.”
While states cannot accumulate debt, the federal government is permitted net borrowing at a maximum of 0.35% of economic output. However, over the years, the idea of a debt brake has been contested – no other G7 country exercises such strict limits on borrowing. Left-aligned parties have criticised the rule as restricting vital government spending. Some economists have decried the rule for not permitting adaptive government response to a crisis, and for otherwise suppressing investment in education and infrastructure.
Bypassing the debt brake
Germany has bypassed the relevant section of the Basic Law in the past, but this is generally a major hurdle given that any amendment to the law requires a two-thirds vote in the Bundestag or German Parliament.
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It also has an exception, allowing the country to exceed its borrowing limits during a national emergency or a recession. In 2020, the rule was suspended for three years until 2023 to manage the costs of the Covid-19 pandemic.
With the onset of the Russia-Ukraine war in 2022, the Bundestag approved a €100bn fund in a proactive effort to modernise the country’s armed forces. The war also pushed the German economy toward a recession by 2024, following the abrupt hike in energy prices and supply disruptions.
What the current proposal says
- 01
Defence spending
The tripartite group agreed to exempt security spending above one per cent of economic output from the country’s constitutionally enshrined ‘debt brake’ spending cap.
Theoretically, this means Germany can now borrow unlimited amounts to finance such spending. Defence spending here refers to civil defence, IT security and “aid to states attacked in violation of international law”, a reference to Ukraine.
- 02
Infrastructure investment
Additionally, the political grouping agreed to create a special fund of €500 billion ($545 billion) to finance infrastructure investment. Of this, state governments will spend €100 bn ($109 bn). States will also be allowed to borrow up to 0.35% of GDP above the debt brake, amounting to €16 bn (approx $17.5 bn).
- 03
Climate fund
Allocate €100 billion for the climate and economic transformation fund. The Greens created this fund in the previous administration, when the party was in charge of climate policy.
Role of the Greens
In 2023, the CDU/CSU bloc (then constituting the Opposition) moved court against a reallocation of €60 billion of unused funds meant for Covid response toward the Climate and Transformation Fund (KTF).
Cut to 2025. The same bloc, now in power, needs the support of the Greens to push through a deal to enhance Germany’s infrastructure and defence while reducing its reliance on the US under the new Trump administration.
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This time, the Greens made their displeasure about using funds to boost defence spending known, and expressed concern about the haste with which the CDU/CSU and SPD pushed for the motion. The proposed allocation of over €100 billion for the Climate Fund is therefore significant: it supports the party plank of fighting climate change. Further, the Greens are in government in seven German states.
Era of German assertiveness?
Merz had extensively campaigned on fiscal conservative promises. He campaigned on reviving the economy through deregulation and tax cuts to boost spending and investment, while advocating for strengthening immigration control.
Before the election, he said he would not push for relaxing the debt brake to increase military spending, but would cut other government spending.
However, Trump’s inauguration and subsequent messaging from the new US administration sympathetic to the far-right AfD party seem to have hardened Merz’s resolve to position Germany as independent of American interference. Trump himself has repeatedly threatened to pull back America’s long-standing security blanket of military support for Europe if the continent did not finance such spending.
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The centrist parties have seemingly united under fears of European vulnerability to military aggression from Russia and American apathy. The new policy could signal the start of a new era of German assertiveness, unfettered by concerns of prudent economic policies.
