Germany’s typically “hawkish” central bank governor, Joachim Nagel, has shifted from discussing technical adjustments to proposing more significant reforms to the country’s constitutional budget deficit rule.
Germany’s stringent constitutional rule on new borrowing, known as the “debt brake,” has been a focal point of political debate in recent years. The rule restricts the federal government’s structural deficits to 0.35% of GDP, while regional governments (states) are entirely barred from running structural deficits.
Disagreements over the debt brake contributed to the collapse of the previous three-party government coalition in November. However, it now appears that a major overhaul is possible.
“We have to work on the overall concept of the debt brake,” Bundesbank President Nagel stated during a side event at the annual meeting of the World Economic Forum (WEF) in Davos, as reported by the German daily FAZ.
Traditionally, the Bundesbank has been known for its “hawkish” stance on both monetary and fiscal policy, emphasizing price stability. However, the bank has recently shifted its position, proposing a “stability-oriented reform” that would permit increased public investment if the overall public debt level falls below the EU’s target of 60% of GDP.
In Davos, Nagel emphasized that the reform should extend beyond “small changes.”
German political parties, however, hold differing views on such a debt rule change. The left-leaning factions advocate for a major reform to enable greater public investment. In contrast, the Christian Democrats (CDU/CSU) support maintaining the status quo in their election manifesto. Nevertheless, party leader and likely next Chancellor Friedrich Merz has recently expressed openness to reform, albeit with strict conditions on how additional debt should be allocated.
Meanwhile, Chancellor Olaf Scholz suggested that a “moderate” reform of the debt brake could allow for additional investments of 5 to 10 billion euros annually. However, he cautioned that this would still fall short of addressing Berlin’s broader spending needs.
According to Eurostat data, Germany’s public debt currently stands at 62% of GDP, 20 percentage points below the EU average and significantly lower than other G7 economies, all of which have public debt exceeding 100% of GDP.
