Is Germany Without Its Debt Brake on the Right Track?

Long before Germany's decision to launch an aggressive military buildup in response to the Trump administration's new isolationist policy, a strong voice in Germany advocated for a relaxation or reform of the debt brake enshrined in the German constitution. A selection of prominent economic strategists, including IW Director Michael Hüther, share their thoughts on this in a symposium of views for The International Economy.

Germany’s rigid fiscal framework, particularly the debt brake, has proven inadequate for investment needs even in normal times. Demographic pressures and weak growth further constrain fiscal capacity, with local governments struggling under high debt and investment demands. In this context, the government’s €500 billion infrastructure fund over twelve years was both necessary and urgent, also signaling the private sector to expand ist productive capacity.

However, inflationary pressures remain a concern due to Germany’s limited production potential and demographic trends that could create capacity bottlenecks. Expanding the labor force is crucial, requiring measures such as discouraging early retirement, introducing flexible retirement models, incentives for extending annual working hours, and more managed migration into the labor market.

For Europe, Germany’s increased investment in defense and infrastructure is a welcome shift. The continent has finally stopped sleepwalking through geopolitical realities and must take greater responsibility for its own security and economic resilience. As Europe’s largest economy, Germany plays a key role.

"Germany’s increased investment in defense and infrastructure is a welcome shift. The continent has finally stopped sleepwalking"

The benefits outweigh the slight rise in credit risks. Our projections show that Germany’s debt-to-GDP ratio rises moderately to just over 80 percent in the 2030s, still low by international standards and with respect to the challenges to be addressed (including restoring defense capability and strengthening competitiveness to enable decarbonization). Interest payments will remain manageable at an estimated 17 percent of government revenues, well below late 1990s and early 2000s levels. While bond yields have risen, they remain moderate compared to other European countries and, especially, to the United States. Additionally, fiscal improvements in Greece, Spain, and Portugal since the euro crisis bolster European stability. 

Adapting the Stability and Growth Pact to new geopolitical realities—such as the Commission’s decision to exclude defense spending from fiscal rules—is a prudent step. Nevertheless, beyond fiscal flexibility, stronger cooperation in European defense policy and procurement is essential for scaling in military production and the reduction of unit costs. Germany and Europe’s future hinges on two key areas: bolstering defense capabilities and ensuring economic competitiveness to attract private investment. Investments in defense and infrastructure, especially driven by Europe’s biggest economy, will strengthen Europe’s strategic position, ensuring security and long-term economic stability amid global challenges like deglobalization, protectionism, and geopolitical risks.

The first step has been taken. Now Europe, including the German government, must use this opportunity wisely through a comprehensive agenda for structural reforms. Former ECB president Mario Draghi’s report on the future of European competitiveness not only provides the analytical basis for this, but also offers guidance for the necessary measures. It seems as if the EU Commission has understood this. The new German government will still have to find its way.