Germany's Debt Brake Reformed: $1 Trillion+ in New Borrowing and Spending on Defense and Infrastructure
The two major political parties expected to form Germany's next government have agreed to loosen the country's constitution restrictions on borrowing, paving the way for over 1 trillion euros ($1.08 trillion) or more in new spending on defense and infrastructure. This significant change marks a shift away from Germany's long-standing debt-averse culture and rejection of conventional economic wisdom that has dominated Europe's biggest economy for years.
What is the Debt Brake?
The debt brake, also known as the "debt rule," was introduced in 2009 in response to the global financial crisis. The rule limited new borrowing to 0.35% of Germany's gross domestic product (GDP), which is a relatively tight limit compared to European Union budget rules requiring less than 3%. This constraint reflected Germany's cultural and political skepticism about debt, which has had a lasting impact on the country's politics.
How did the Debt Brake Work in Practice?
The debt brake appeared to function effectively for many years, allowing German governments to operate within its limits during the good times of the 2010s. However, the pandemic, slowing growth, and Russia's invasion of Ukraine put significant pressure on the rule. To address these challenges, the government had to invoke emergency clauses multiple times to borrow and spend more on pandemic relief, defense spending, and other areas.
What does it mean for Europe's Defense Buildup and Efforts to Support Ukraine?
The reformed debt brake would remove the constitutional ceiling when it comes to defense spending. This change would enable Germany to increase its military expenditures and support Ukraine in its fight against Russia. Germany has already been a leading contributor to Ukraine, providing 60 Leopard tanks, 175 Marder infantry fighting vehicles, and 27 air defense systems.
What exactly did Germany's political parties decide?
The leaders of the conservative Union bloc and the center-left Social Democrats agreed to exempt military spending exceeding 1% of GDP from the debt limit. Additionally, they established a 500 billion euro infrastructure fund for civil and disaster protection, transport infrastructure, hospitals, energy infrastructure, education, scientific research, and digitization. Economists estimate that this measure could enable over 1 trillion euros in new borrowing and spending over a decade.
Why did the parties act now?
The parties plan to rush the changes through the current parliament next week because mainstream parties have the necessary two-thirds majority in the old parliament but will lose it in the new parliament due to electoral gains by far-right and far-left parties who oppose the changes. The measure still requires votes from the environmentalist Greens, who were not part of the coalition talks.
What does it mean for the German economy?
Economists believe that the looser debt brake could help Germany emerge from five years of economic stagnation by increasing spending on long-term economic activities. Skimping on infrastructure has been blamed for various issues, including trains not running on time due to track repairs, crumbling bridges, declining educational achievement levels, and lagging adoption of renewable energy and digital technology.
Conclusion
The reformed debt brake is a significant shift in Germany's policy direction, marking a departure from the country's traditional debt-averse culture. This change has far-reaching implications for Europe's defense buildup and efforts to support Ukraine, as well as for Germany's economy. As economists start revising their growth forecasts, it remains to be seen whether this "game-changing" step will live up to its promise.