EXPLAINED: Why Germany may finally reform its debt brake

As the campaign towards a federal election gets started, Friedrich Merz, leader of Germany's conservative Christian Democrats (CDU) surprised voters when he said he is open to reforming the debt brake. 

Merz had previously been known as a staunch supporter of sticking to the debt brake (Schuldenbremse), which limits how much governments can borrow. His reversal on that position suggests that Germany’s leading conservative party is beginning to rethink its core economic positions.

A debt brake reform could allow the German government to radically adjust the federal budget, potentially opening up significant funding for economic stimulus, defence, infrastructure upgrades and more.

On the other hand, adherence to the debt brake would leave Germany’s next government in the same predicament that caused the traffic light coalition - comprised of the Social Democrats, the Greens and the Free Democrats - to collapse.

Germany’s infamous debt brake

The debt brake was introduced by the CDU in 2009 under Angela Merkel. It effectively limits the amount of money Germany can borrow for the federal budget each year. 

The idea is that the debt brake limits borrowing to a reasonable level – it sets a limit on the public deficit at 0.35 percent of gross domestic product generally.

Proponents of the cap suggest that out of control borrowing would leave future generations with a heap of national debt to pay off.

READ ALSO: Schuldenbremse - What is Germany's debt brake and how does it affect residents?

The problem, however, is that reacting to the increasingly imminent threats of geopolitical conflict, climate change, and economic recession may require more money than could be borrowed according to the debt brake.

As it stands, exceptions are allowed during national emergencies, like during the Covid pandemic for example. But increasingly, economic experts and political leaders alike have suggested that perhaps the debt brake needs to be more seriously amended.

Why experts have called for reform

This week AFP reported that a council of independent economists that advises the government called for major debt brake reforms. The council noted that years of underinvestment in key areas like infrastructure, education and defence were central to Germany's problems.

"By international standards, Germany is lagging far behind economically," said the five-member council in their annual report, stressing that "structural problems" were increasingly holding the country back.

Their comments reflect commonly heard complaints in Germany: from the decrepit state of the railways to the threadbare condition of the armed forces and the slide of the country's schools down international rankings.

Public spending focused on boosting the economy's future prospects had been too low for years, especially when compared to the rest of Europe, the experts said.

While the current rules are aimed at preventing future generations from being saddled with high debts, they may ultimately find themselves "burdened by insufficient expenditure focused on the future", warned council member Achim Truger.

"The debt brake does not ensure spending for the future is correctly prioritised."

What would a reform look like?

The council proposed an easing of the rules to allow the state to borrow up to 0.5 percent of GDP if public debt remains below 90 percent of GDP. If debt drops below 60 percent of GDP, this figure could rise to one percent of GDP.

CDU leader Merz suggests that re-thinking the debt brake is not a problem but he is only open to increasing borrowing for certain aims.

"Of course it can be reformed. The question is, why? For what purpose? What is the result of such a reform?" Merz said at an event this week according to Reuters.

For his part, Merz says he is not open to increasing spending on consumption or welfare. He would, however, be open to extra borrowing that was aimed at boosting investment in Germany.

Why the sudden change of heart?

From a political strategy point of view, it makes sense that Merz is open to debt brake reform now that he is hoping to take power of the German government after the February elections.

The CDU/CSU are leading in opinion polls, meaning they are likely to lead a future coalition. 

READ ALSO: What would a CDU election win mean for Germany?

Strict adherence to the debt rules was central to a long row over the budget that led to the collapse of Chancellor Olaf Scholz's traffic light coalition government last week.

While in government the pro-business Free Democrats (FDP), led by former Finance Minister Christian Lindner, were fierce defenders of the debt brake. This was a hindrance to the Social Democrat (SPD) and the Green parties, whose policy ambitions were often held back by a lack of funding.

Members of the SPD and Green parties had called for a debt brake reform at various times in recent months, especially when it blocked budget negotiations from moving forward.

Meanwhile, the CDU had backed the FDP position on the debt brake, preventing the SPD or the Greens from adjusting it, until the traffic light coalition collapsed. 

But if the CDU were to lead a new government coalition from February, they would face the same funding challenges with the debt brake. Hence the sudden change of position.

Following the statement by Merz, the leader of the SPD said they'd be open to moving forward on the reform immediately - suggesting it wouldn't have to wait until the formation of a new government.

Bruno Hönel, a member of the budget committee of the Bundestag from the Green party, imagines that the debt brake will be reformed as soon as the CDU takes power.

He told Reuters: "Merz has blocked this for three years just to say now, three months before the election, 'I can actually imagine it.'"