The German debt brake isn’t just a problem for Germany; it threatens the ability of the European Union to address the growing array of challenges it faces. The brake was introduced by Angela Merkel, the then chancellor, in 2009 during the EU financial crisis, It binds the federal government and 16 states to run balanced budgets and only permits borrowing in exceptional circumstances.
Berlin’s diagnosis of the euro zone crisis was that it was caused by excessive debt and borrowing and its prescription was swingeing austerity programmes. It was a misguided approach that led to major market upheaval.
But fiscal rectitude was consistent with the German economic model. It relied heavily on export-led growth, mainly by selling its cars to China, the US and other export markets. This model has come under intense pressure over the past few years as German car sales have plummeted.
The debt brake has compounded Germany’s economic woes as the emphasis has been on debt reduction for well over a decade, meaning there has been very little investment in the country’s physical and digital infrastructure.
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Friedrich Merz, the leader of the CDU Party and the most likely next German chancellor, has vowed to reform the debt brake, boost spending on defence and make the economy more competitive. But he faces challenges from the far right AfD and the hard left Linke party. Both are opposed to removing the brake and between them have a blocking majority in parliament.
Merz must rise to the challenge. Reports over the weekend said talks were underway to try to agree a deal in the final weeks of the outgoing Bundestag term.to boost defence and infrastructure spending
If the economy remains in a slump, the political centre will decay and it will pave the way for the AfD in the next election. Moreover, the EU needs a strong Germany now more than ever. If Merz is to assume an EU leadership role, he must first address Germany’s deepening problems, starting with the debt brake.
