The economic challenges that Germany faces

Germany’s budget crisis has given new momentum to reforming self-imposed borrowing limits even among the opposition conservatives, as hunger for sorely needed investment trumps an earlier political obsession with fiscal rectitude.

A constitutional court ruling on Nov.15 against a budget manoeuvre to get around Germany's "debt brake" threw the financial plans of Chancellor Olaf Scholz's coalition into disarray.

It also indicated that his and future governments would have to stick more closely to the spirit of the brake, which limits a government structural budget deficit to 0.35% of gross domestic product, even as spending needs rise, according to Reuters.

Business and political leaders fear Berlin will not be able to finance responses to growing challenges, from climate change to the Ukraine war. Europe's largest economy has already suffered years of chronic under-investment, contributing to its current stagnation, economists say.

Calls are growing for reform of the brake, even among conservatives, whose complaint prompted the court ruling. Those in power at state level and having to deal themselves with the consequences of the ruling are particularly open to a new debate.

Billions of euros in state subsidies agreed with US chipmaker Intel for planned plants in the Saxony-Anhalt – considered key for Germany's transition to a carbon neutral economy – are now up in the air, for example.

German under-investment is already around 300 billion euros over the past decade vis-a-vis other AAA-rating economies, according to Scope Ratings.

Reforming the brake would mean changing the constitution, which requires a two-thirds supermajority in parliament and still looks a long way off.

Federal CDU leader Friedrich Merz, who is reaping the benefit of a government in turmoil, continues to say Germany should stick to the brake.

 A government spokesperson said on Friday reform was not on the agenda for now.

Germany introduced the brake with cross-party consensus in 2009 in the wake of the global financial crisis and at the dawn of the European debt crisis.

But it has had to suspend the brake since the onset of the coronavirus pandemic in 2020 – which it is allowed to do in the event of "exceptional emergencies" – in order to finance its response.

Since then, further crises have piled up, forcing it to resort ever more to off-budget funds, even as debt has become more expensive with interest rates rising.

The court ruling on Nov.15 against a budget manoeuvre to shift 60 billion euros of unused pandemic aid to a fund for a green transition has suggested Berlin will need to stick more closely to the spirit of the brake going forwards.

It also forced the government this week to suspend the brake for the fourth year running – a clear sign reform was necessary, said ING Chief Economist Carsten Brzeski.

The Greens' campaign programme ahead of the last election included debt brake reform to allow for greater investments. Proponents of reform are growing more vocal in Scholz's SPD too. The opposition far-left Left party has always been against the brake.

Conservative politicians still fear reforming the brake will foster fiscal laxity at home and indirectly elsewhere in Europe. To avoid that, they are proposing very targeted solutions.

Lawmaker Roderich Kiesewetter proposed exempting all investments in the military as well as support for Ukraine from the brake, rather than rewriting it altogether.

Others have proposed solutions that do not involve touching the brake, such as creating a new off-budget fund written into the constitution, like the special fund to upgrade the military established after Russia's invasion of Ukraine last year, to focus on investment.

The issue is to become more pressing for the conservatives at the latest by the 2025 federal elections, said one member of the CDU's federal leadership. Polls suggest they are on track to win, meaning the government's fiscal woes will become theirs.