To frame it in a nutshell, Germany has a constitutional rule that limits borrowing as a percentage of GDP. The newly elected Leader of the CDU is working overtime to skirt this rule, quickly. We look at why.
Understanding The Debt Brake
Germany’s “Debt Brake” (Schuldenbremse) is a fiscal rule embedded in the country’s constitution, specifically in Articles 109 and 115 of the Basic Law. Introduced in 2009 under Chancellor Angela Merkel’s government, it aims to ensure fiscal discipline by limiting the federal government’s structural budget deficit to 0.35% of GDP annually, while requiring Germany’s 16 federal states (Länder) to maintain balanced budgets without borrowing in normal times.
The rule includes a cyclical component that allows additional borrowing during economic downturns, provided the extra debt is repaid during recoveries, and an emergency clause permitting suspension in cases of “natural disasters or unusual emergencies” beyond government control, such as the COVID-19 pandemic or the Ukraine war’s energy crisis.
The Debt Brake was a response to rising debt levels after the 2008 financial crisis and Germany’s reunification costs, reflecting a cultural and political commitment to fiscal prudence rooted in ordoliberalism, a German economic philosophy emphasizing stability and balanced budgets.
Enter Friedrich Merz
The newly elected leader, Friedrich Merz of the Christian Democratic Union (CDU), who won the February 23, 2025, snap election and is poised to become chancellor after coalition negotiations, is pushing to reform the Debt Brake. Historically a staunch defender of the policy, Merz has recently softened his stance, signaling openness to change during his campaign and post-election statements.
His shift is driven by several pressing realities. Germany’s economy has stagnated, shrinking in 2023 and 2024, with growth forecasts for 2025 remaining weak due to high energy costs, an aging population, declining export competitiveness (especially in manufacturing and automotive sectors), and chronic underinvestment in infrastructure, digitalization, and education. Critics argue the Debt Brake has exacerbated these issues by restricting public investment, leaving Germany ill-equipped to address structural challenges or global uncertainties like Donald Trump’s reelection and potential trade wars, Russia’s aggression, and China’s rise.
What Exactly Does He Want
Merz’s reform push focuses on loosening the Debt Brake to allow more borrowing for specific purposes, particularly investment in defense and infrastructure, rather than abolishing it outright. Media reports indicate that coalition talks with parties like the Social Democrats (SPD) or Greens—both of which favor relaxing fiscal rules—may involve exempting defense spending from the cap or creating special funds, potentially unlocking significant resources (up to half a trillion euros, according to some reports).
This shift is partly a response to external pressures, such as Trump’s expected demands for higher European defense contributions, and domestic calls from figures like outgoing Defense Minister Boris Pistorius, who argue the military needs funding beyond the current 2% GDP NATO target. However, any reform requires a two-thirds parliamentary majority, a high bar given opposition from the Free Democrats (FDP) and the far-right Alternative für Deutschland (AfD), complicating Merz’s plans.
The Bottom Line
The rationale for change also reflects a broader debate: while the Debt Brake has kept Germany’s debt-to-GDP ratio low (around 65%, compared to France’s 112%), critics say it hampers long-term growth and crisis response, pointing to evidence that austerity can increase debt ratios over time by stifling economic activity. Merz’s proposal to tie additional borrowing to growth-oriented investments, rather than welfare or consumption, aims to balance fiscal responsibility with economic necessity.
Yet, his suggestion to fast-track reforms before the new parliament fully convenes has sparked accusations of undermining democracy, highlighting the tension between urgent policy needs and political process. In short, Merz seeks to adapt a once-sacrosanct rule to a changed world, where Germany’s economic and security challenges demand flexibility over rigid orthodoxy.