German Election Kicks off Debt Brake Tension

Addressing Germany’s public debt moving forward has become more of a convoluted subject in the lead up to the country’s 2025 election. Considering that the debt brake was a key reason for the demise of Chancellor Olaf Schloz’s three-party coalition in early November, prompting former Chancellor Angela Merkel to call for a relaxation in Germany’s fiscal rules, the future of Germany’s approach to fiscal management has been forced into the forefront of public discourse as lawmakers now weigh their options on how to address budgetary oversight. 

Germany’s debt brake, more formally known as the balanced budget amendment, is a fiscal rule that was introduced in 2009 in reaction to the country’s surging public debt resulting from the 2008 financial crisis.

The constitutional amendment limits federal government borrowing to 0.35% of GDP in hope of reducing the looming debt burden that the country had found itself in. Although the rule has found itself suspended over the course of the Covid-19 pandemic, and again after Russia’s full fledged invasion over Ukraine, the mechanism’s enforcement of prudent fiscal policy has proven to be a success, reducing national debt to just under 63% of GDP. However, increased strain on the public purse in recent years has called the sustainability of the amendment into question, as demands on public expenditure have begun to snowball, causing many lawmakers to ponder the possibility of reform. 

Russia’s invasion of Ukraine has impelled the German government towards reevaluating their outlays on their military; the central European state has entertained the possibility of boosting their defence budget beyond the 2% of GDP recommendation promulgated by the military alliance NATO. Coupled with the additional financial burdens complicated by a rise in the dependency ratio and the need for increases in infrastructure spending, it has become clear that the ballooning demands in Germany’s finances demand review.

Conflicting views and rising tensions surrounding fiscal management have become more apparent in the last few months, as it is the debt brake that ignited the collapse of Chancellor Olaf Scholz’s coalition between his party, the Social Democratic Party, the Free Democratic Party, and the Greens.

The Finance minister, Christian Linder, and his fiscally conservative stance on the government’s budget did not bode well with his coalition partners, as many of them considered it a restraint on the further aid that they wished to provide Ukraine. He was later fired. It was Linder’s departure from government that caused his party, the FDP to join him in withdrawing from the coalition, consequently triggering a snap election in 2025. 

To some, the need for an overhaul to this amendment appears to be an inevitable fate- former Chancellor Angela Merkel stated in her recently published memoir that she now recognises the need for a relaxation to the rule.  But many have still voiced their concern over maintaining fiscal responsibility as a means of protecting the interests of future generations by not troubling them with a greater debt burden, the FDP being the primary champions of this stance. 

It appears that Germany is at a crossroads, with a problem that is suggested to be in talks for the next few months. As we move closer to Germany’s election, the jury is still out on where the country and its lawmakers stand on whether to stick to the status quo, or change its approach.

---

To receive more stories like this right in your inbox every week, subscribe below:

Subscribe