Debt Brake: How this fiscal rule can shape German elections | Explainer News

As Germans prepare to vote on Sunday, the country’s slump in economic growth will be at the forefront of the heart along with immigration and the Ukrainian war.

The financial mechanism known as the debt brake, which strictly limits government borrowing, has become a fault line of German politics, with the last government collapse that has been condemned for the issue.

The world’s third largest economy has been shrinking for the second year in a row as politicians ask whether the financial straight jacket is hampering investments that could drive growth.

A considerable number of potential voters remain undecided, but Friedrich Merz’s Conservative Christian Democrat Union (CDU) is a clear favourite for becoming the largest party in Congress. Germany (AFD)’s far-right alternative has gained a great deal of popularity behind the anti-immigration agenda in recent years, ranking second in the poll.

So, what is the debt brake? And why has it become a major election issue in the eurozone’s biggest economy?

What is debt brake?

Debt brake, or “Schuldenblemse,” excludes emergency situations, will take 0.35% of Germany’s gross domestic product (GDP) into new federal borrowings, prohibiting 16 states from assuming new debts. It’s there. It is designed to prevent irresponsible government spending.

It was introduced in 2009 under former Prime Minister Angela Merkel in the wake of the global financial crisis. The rules came into effect in 2016, but were stopped again during the Covid-19 pandemic and after Russia’s invasion of Ukraine. This law was revived last year.

In her recent memoir, Merkel called on Germany to ease the debt brakes, in signs of increasing political pressure to overhaul rules that many economists said were too inflexible. Ta.

Germany has the lowest public debt in the large eurozone economy. In Italy, the government’s debt ratio corresponds to 141% of GDP. In France, it’s 112%. In Germany, it’s only 65%. In the International Monetary Fund’s view, debt sustainability is not a pressing issue for Berlin.

And that is reflected in public opinion. According to a January poll by Forsa on behalf of the German Foreign Relations Council, 55% of Germans suffered strict borrowing restrictions compared to 32% in July. I support it.

Will the German economy benefit from more public investment?

Before the election this weekend, polls show that money is at the pinnacle of voters’ minds. And there’s a good reason. Economic growth has been anemia since 2019 and has been negative since 2023. Forecasters are also holding pencils to slow growth in 2025.

Long considered a manufacturing powerhouse, Germany has struggled to dodge the growth of competition with China. Industrial work as a share of total employment has declined from 40% in 1990 to 27% today.

Germany’s sputtering industry sector could face further potential trade wars with the United States. Demand for major exports of machinery, automobiles and industrial tools fluctuates with global growth, which falls in the event of higher global tariffs.

The country’s aging population, energy and housing infrastructure must also be upgraded.

Elsewhere, Berlin spends 2.1% of its GDP on defense, surpassing NATO’s annual target. But that’s thanks to a 100 billion euro ($100 billion) fund created for the war in Ukraine. The fund is expected to dry out by 2027, and Berlin will face tough questions about how it will meet NATO obligations without breaking fiscal rules.

What’s worse, Germany’s population is aging. The number of people over the age of 64 is projected to increase from 41% to 24 million by 2050, accounting for almost a third of the population. The proportion of work to retired people will decrease and the tax base will decrease.

Concerns about the strength of Germany’s economy have also undermined private investment, which is further included by rising corporate tax rates.

Still, the debt brake has hampered successive governments from large spending projects. Public investment has been stable at around 2-3% of GDP in recent years, lower than in other countries in the region.

The result is that German highway authorities have identified an investment needs of 45 billion euros ($47 billion), with a nationwide shortage of achieving net zero carbon emissions by 2045 at 800,000 households. That means there is. I spend every year.

Addressing Germany’s numerous structural challenges would cost around 600 billion euros ($628 billion) by 2030, according to the German Institute for Economic Research.

Many economists are urging the government to use the financial sloppy space to increase production.

“Serious efforts to fundamentally reform and improve the German economy need to come with fiscal stimulus,” Carsten Brzeski, global head of macro research at the Bank of Netherlands, told clients in a memo. .

He added: “Finding fiscal space for all the policies needed in austerity alone looks like the impossible of a mission.” As such, the new government must agree to a loose fiscal policy. [i.e., relaxing the debt brake]Bruzesky said.

Why is it such an important election issue?

The debt brake was almost behind the collapse of the governing coalition in November. Prime Minister Olaf Scholz pushed for a halt in the budget proposal to pay additional expenditures in Ukraine. However, this was resisted by coalition partner Finance Minister Christian Lindner, Christian Lindner. Lindner was later fired.

The coalition meeting could be dragged over for months as no party has been set up to win a simple majority in Sunday’s election. The new government’s top priority is to agree to this year and 2026 budgets.

Meltz, a clear frontline for becoming prime minister, has promised to “support” the brakes on debt, but he also keeps the door open for change.

“Of course, it can be reformed,” Meltz said. “The question is, why and for what purpose,” he said he would not pursue extra borrowing for more welfare spending. But if additional borrowing encourages investment, “the answer may be different,” he said.

Overall, liberal FDPs, conservative CDUs and far-right AFDs want to reduce government deficits, reduce welfare benefits, and maintain existing fiscal rules. On the other hand, leftist parties such as the Social Democrats of Scholz (SPD) and Greens want to relax the debt brakes and increase public investment.

“The slowdown in the economy is taking a toll on the political situation,” according to Shahin Valley, a senior researcher at the German Council of Foreign Relations.

Many commentators believe that long-standing slow growth and simmering economic dissatisfaction is partly responsible for the rise in anti-establishment AFD.

What is the future of Germany’s debt brakes?

German central banks have long sought tweaks to the fiscal mechanisms that allow for a slight increase in borrowing. Most critics expect only a limited relaxation rather than a complete overhaul of the borrowing cap.

But it’s not easy. Changes to the rules would require a two-thirds majority in both the top and bottom homes of the council. The AFD, which condemns environmental regulations and low growth in mass immigration, is opposed to fiscal reform, as is Lindner’s FDP.

Meltz recently passed an anti-immigration law with the support of the AFD, but he refused to form a coalition government with the party, which is expected to win 20% of Sunday’s vote.

Therefore, Merz must form a coalition with one or two parties to the Scholz government, the SPD and Greens, who vote in third and second place before the election.

One possibility is that SPD and Green agree to condition him to enter the coalition with Meltz to remove certain expenditure items, particularly those related to climate change-related investments, from the brakes. That’s what it is.

For Vallee, there is a growing consensus that debt brake reforms now need to be firmly “on the table…” in Germany’s fiscal policy needs to be revised. Deeply, I think Meltz secretly is pleased to be forced to spend more publicly. [left-wing] A partner of the Union. ”