A leading critic of Germany’s debt brake has urged politicians to expedite its reform before the brake breaks Germany. University of Düsseldorf economist Jens Südekum’s warning comes after ex-chancellor Angela Merkel joined the debt brake reform camp this week – adding pressure on her centre-right Christian Democratic Union (CDU) to follow.
“Germany cannot waste any more time. The reform of the debt brake and the start of a major investment programme needs to come as early as possible,” Prof Südekum told The Irish Times. “Germany needs to launch a major reform package, including of the debt brake, otherwise the current crisis will exacerbate.”
It’s 15 years since a CDU-lead Merkel government, in response to the banking crisis, anchored the debt instrument in the postwar Basic Law. It prohibits the federal and state governments from taking on new debt annually beyond 0.35 per cent of economic output – except in emergencies.
In her memoir Freedom, published on Tuesday, Dr Merkel insisted the brake remains essential to avoid a debt mountain for future generations. She added, however, that the instrument “needs to be reformed to allow higher levels of debt to be assumed for the sake of investment in the future”.
Her shift follows a surge in warnings that the rule has compounded Germany’s ongoing economic difficulties and strangled public investment.
While long-term critics of the debt brake welcomed the new Merkel flexibility, many wondered aloud why the original instrument lacked this differentiation.
Her shift adds to expectations on Friedrich Merz, her successor as Christian Democratic Union (CDU) chair and chancellor hopeful after federal elections in February.
Earlier this month Mr Merz indicated that, apart from a few untouchable clauses in the Basic Law, “everything else can be debated”. While he rejected additional borrowing for welfare spending, he said “the answer may be different” on borrowing for investment.
A month ago federal economics minister Robert Habeck proposed just that: a multibillion debt-backed stimulus plan to “unleash a big boost for the national economy”.
The plan for “mid three-digit billion” spending was largely debt financed because the minister “didn’t see any other realistic political option”. Like many other government plans his “Germany Fund” came to nothing after the liberal Free Democratic Party (FDP) walked out of government in a long-running fiscal row where the debt brake played a key role.
Despite the Merkel debt brake shift, Prof Südekum says no progress is likely before a new government is formed by April or May at the earliest. “Immediately afterwards,” he warned, “Germany needs to launch a major reform package, including the debt brake, otherwise the current crisis will exacerbate.”
Restrictions on borrowing and a push to balance budgets in the Merkel era throttled rail investment. The disastrous rail network made international headlines during the European Championships. September’s bridge collapse in Dresden has added urgency to demands for more infrastructure investment.
Last July the International Monetary Fund (IMF) called for reform of Germany’s debt brake. In its study of gross public investment in 29 countries, it placed Germany in third-last place (and Ireland last).
On Monday ARD public television aired a show where 100 studio guests were asked to vote on whether “more debt is the answer” to Germany’s infrastructure misery. After hearing pro and contra arguments some 68 per cent favoured higher debts for investment while 27 per cent were opposed.
A representative opinion poll for ARD in August showed a different picture: a narrow majority (53 per cent) backing the debt brake in its current form, with 41 per cent open to reform.
This week the European Commission warned Germany that its debt-to-GDP ratio of 64.28 was already beyond euro limits – though almost half that of France on 115 per cent.
For ING global head of macro analysis Carsten Brzeski, the debt brake is a tool from another time: when German debt stood at 70-80 per cent of GDP. In a note to investors he said new ideas were essential to rescue a stagnant economy, where industrial production is around 10 per cent below pre-pandemic levels.
“Either with full legal changes or new flexibility,” he added, “we expect the next German government to agree on additional fiscal stimulus.”
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