Joachim Nagel, president of the Federal Bank of Deutsche Government, delivered a speech in his 2024 annual report in Bundesbank in Frankfurt, Germany on Tuesday, February 25, 2025.
Alex Kraus | Bloomberg | Getty Images
The German central bank on Tuesday proposed far-reaching reforms to the ceiling set by the constitutional lending, which could put the government in an additional cash of up to 220 billion euros ($232 billion) in defense and investment over the decade.
Some investors and political parties believe that the so-called debt brakes limit the budget deficit to economic growth of 0.35% of GDP. The German economy is Europe’s largest, shrinking in the past two years, with debt brakes limiting state investment when the private sector struggles and consumers lose confidence.
While increased spending flexibility will be the key to restoring the fate of Germany’s economy, the deputy prime minister awaiting Friedrich Merz said that given the complexity, rapid reform of fiscal rules is impossible.
But the need for Germany to strengthen its defense spending has increased the need to modify fiscal rules, especially after the United States said it would suspend military aid to Ukraine.
The core of the proposal by the German bank is that if the debt is below 60% of GDP, the government’s borrowing range is up to 1.4% of GDP, with the total of 0.9 percentage points of investment, mainly fixed asset formation.
If the debt exceeds 60% of GDP, borrowing will be limited to 0.9%, all of which will be invested.
“If the debt ratio is below 60%, the debt capacity will increase by 220 billion euros compared to the current status quo by 2030,” the Federal Bank said. “If the debt ratio exceeds 60% … then by 2030, the amount will be 100 billion euros higher than the status quo.”
Germany’s total debt accounts for about 62% of GDP, but lowered its debt despite weaker growth. Although this is a relatively low figure in the world’s largest economy, German voters with debt and inflation often reward serious governments.
The rationale behind German banks’ figures is that debt will continue to drop to 60% even in relatively weak growth.
The outgoing parliament can still green a new special fund to increase defense spending and ensure rapid assistance to Ukraine.
Government banks say such special funds are also possible, adding that its own preference is debt brake reforms, as special funds have restrictions and are less transparent.
“We want to make a basic reform of debt brakes to provide better predictability, but special funds with comparable financial parameters are also an option,” said Joachim Nagel, president of Des Bank.
