Breakingviews - New spendthrift Germany will face reform challenge
It's easy to spend, and to spend big, when your debt is at one of the lowest levels among euro zone countries, at 63% of output, and international creditors are eager to lend. Germany's budget deficit will now reach more than 3.2% of GDP at the end of the current parliament in 2029, and the service of its debt, at a predicted 62 billion euros, will then amount to more than 10% of public spending. The days of thrifty Germany lecturing other euro zone members on the virtues of balanced budgets are over.
Besides the accelerated defence buildup, Berlin also decided to increase public investment by more than 50%, to 115 billion euros, as soon as this year. Germany still hasn't adopted a proper budget for 2025, which means that extra spending would have to be disbursed in theory in the last four months of this year. From 2026 to 2029, Germany will keep spending more than 120 billion euros a year on its roads, grid, public housing, education and other public goods.
Merz and his coalition partners had agreed back in March that the old fiscal straitjacket known as the debt brake was no longer viable. Yet the speed of his fiscal loosening may surprise. Berenberg economists now expect Germany's output to grow by 1.25% annually once the stimulus kicks in, having shrunk in both 2023 and 2024.
The key question is how quickly such a surge in spending can be absorbed by an economy hobbled by archaic regulations, where the federal state shares the power to spend with powerful regions. Merz's list of potential investments is long, including repairing an ailing rail network and digitalising a government apparatus that still uses fax machines. But there is a lack of 'shovel-ready' projects, and he will have to contend with a vast bureaucracy, opens new tab that costs the country nearly 150 billion euros in lost output every year, according to the ifo Institute. Unless the chancellor can make the state more efficient and increase German productivity, his fiscal revolution may only produce a temporary growth spurt or, worse still, end up being buried altogether.
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