Why Germany Wants to Loosen Its Debt Brake

New York Times

18-03-2025

The German Parliament is set to vote on Tuesday on a plan to loosen government borrowing limits in order to spend heavily on defense and infrastructure, in an effort to offset America's pivot away from Europe and to lift the country out of years of economic stagnation.
If the measure eventually becomes law, it will radically reorient Germany's relationship to government debt — and, its authors hope, allow Germany to shoulder a more powerful leadership role at a critical moment for Europe.
The center of the plan is a push led by Friedrich Merz, the likely next chancellor, to relax what is colloquially known as the 'debt brake,' a limit on government borrowing that Germany enshrined in its Constitution.
That brake has reduced German debt, but it has also kept the government from investing in roads, software, bridges, tanks and other areas. Lawmakers say that spending is now urgently needed to address declining German competitiveness and shrinking American security guarantees.
Here is a quick guide to the debt brake, how Mr. Merz and his allies want to change it, and the challenges they will face.
What is the debt brake?
Like most wealthy nations, Germany borrows money to help balance its annual federal budget. But unlike some peers, most notably the United States, Germany has a Constitution that limits its yearly borrowing to just 0.35 percent of the country's gross domestic product. There are exceptions for economic downturns and natural disasters.
German lawmakers have voted in recent years to circumvent the limits with some special pots of money, including emergency pandemic spending starting in 2020 and a recent bump in military spending. But by and large, the debt brake has constrained borrowing.
In 2009, when the debt brake was introduced, Germany, the United States and Britain had roughly similar levels of debt as a share of their economies. Since then, that share has soared in Britain and America, but fallen in Germany.
Why does Germany have it?
The debt brake was added to Germany's Constitution after the country's budget deficit grew during the 2008 financial crisis. It became a signature economic policy and a point of national pride.
But the country's aversion to large deficits and debt predates the crisis. Its leaders borrowed heavily to help smooth reunification between West and East Germany in the early 1990s, with mixed economic effects. More notoriously, high government debt helped drive hyperinflation in the Weimar government of the 1920s, aiding the rise of Hitler.
That historical trauma has remained a neuralgic pain that has defined the public and political debate around government debt in Germany for generations.
Why change it now?
The debt brake didn't just depress borrowing. Its critics say it also handcuffed German's ability to spur its economy, invest in its future and lead in European security affairs.
German spending has lagged well behind its needs to upgrade its transportation networks, digitize its public services and make a host of other investments essential to its global competitiveness.
The country's net public investment has been negative for the last 25 years, holding back economic growth, said Marcel Fratzscher, the president of the German Institute for Economic Research.
The brake was also a major reason German lawmakers spent relatively little on their military for decades, under the belief that the United States would continue to protect their country as it has since the end of World War II.
Now, releasing the debt brake has become urgent as the German economy continues to shrink and President Trump threatens to scale back or remove America's security role in Europe.
'It's now or never for a big spending increase,' Mr. Fratzscher said.
Even officials at Germany's staid central bank, the Bundesbank, have called for changes to the debt brake to free up money for government investment to drive growth.
'Rarely in Germany's postwar history has government investment been as necessary as it is today — and rarely since reunification have the potential returns been so promising,' economists at the Deutsche Bank Research Institute wrote last week. 'Germany has successfully used the good years of the past decade to create fiscal flexibility for more challenging times. And times will likely remain challenging for the rest of the decade.'
After resisting calls for debt-limit changes during the recent election campaign, Mr. Merz, of the center-right Christian Democrats, now says the brake much be changed. So do many center-left lawmakers.
'The reform of the debt brake is of central importance in view of the epochal change that the U.S.A. is no longer Germany's reliable ally,' Anton Hofreiter, a member of Parliament for the Green Party, said in a text message this week.
With it, he said, 'It is now possible to finance satellites, intelligence services, cyberdefense and support for Ukraine alongside the urgently needed upgrading of the Bundeswehr' — the German military.
What changes are lawmakers contemplating?
The agreement Mr. Merz struck with the Greens and the center-left Social Democrats would create an exemption from the debt brake for all spending on defense above 1 percent of gross domestic product. It would define 'defense' broadly, to include domestic intelligence, aid to allies and other measures alongside weapons purchases. Effectively, Germany lawmakers could borrow whatever sums the government bond market would allow to fund those items.
Mr. Merz also agreed to create a new infrastructure fund of 500 billion euros — almost $550 billion — spread over 12 years, outside of the debt brake's limits. Of that, €100 billion would be earmarked for projects to fight climate change.
What are the chances they succeed?
Good, but hurdles remain.
Having decided to change the Constitution to allow extra borrowing, Mr. Merz has taken the unusual step of passing the measure in the final days of a lame-duck Parliament, before he can even become chancellor.
On Tuesday, with the help of the Greens and Social Democrats, Mr. Merz hopes to get two-thirds of the Parliament's vote needed to change the Constitution. The margins are slim, and they will depend on some lawmakers who will leave office after this week.
If the vote passes, the change will still need to be approved by the Federal Council of the States on Friday before it can go into effect. That, too, could turn out to be very close.
Even then, the plan faces legal challenges, including from the far-right party Alternative for Germany. Courts have refused to stop the vote thus far.
Lawmakers from the three big centrist parties supporting the package say they are confident they will prevail.
'We should not let this opportunity pass us by — it's a big opportunity for our country and also a real change in politics,' Mr. Merz said on Sunday.