German central bank proposes reforms to government borrowing limits

Germany’s central bank on Tuesday proposed reforms to strict constitutional rules on government borrowing, as the country searches for options to finance a major hike in spending on defence and infrastructure.

The proposal by the Bundesbank, seen by dpa, would tweak the restrictions – known as the debt brake – to allow the next government greater room for manoeuvre.

The debt brake was introduced under former chancellor Angela Merkel in 2009 and limits new budgetary debt to 0.35% of gross domestic product (GDP) every year.

Critics believe the rules have hindered necessary investments in measures to protect the environment and in the country’s infrastructure such as roads and railways.

The Frankfurt-based Bundesbank has suggested that the brake should instead be tied to the ratio of government debt to GDP.

If the German debt-to-GDP ratio amounts to less than 60%, a mark in line with EU rules set out in the Maastricht Treaty, the administration in Berlin would be allowed borrow the equivalent of 1.4% of GDP every year.

However, if debt exceeds the 60% barrier, the Bundesbank proposal would limit annual government borrowing to 0.9% of GDP.

The plan would grant the German government an extra €100 billion to €220 billion ($105 billion to $231 billion) per year by 2030, depending on the debt-to-GDP ratio.

The ratio was at 62.9% in 2023, according to the German statistical office, with the latest figures from the third quarter of 2024 placing it at 62.4%.

Political leaders in Berlin are currently scrambling to agree on how to finance a massive increase in military spending amid the dramatic shift in US foreign policy.

Negotiations are under way between the conservative CDU/CSU bloc – made up of the Christian Democrats (CDU) and the Bavaria-only Christian Social Union (CSU) – and the centre-left Social Democrats (SPD) to form a coalition following elections last month.

The next administration will either have to tackle the debt brake head on, or find creative solutions modelled on the €100 billion emergency fund for the German military that followed the Russian invasion of Ukraine.

Both options would require a two-thirds majority in the lower house of the German parliament, the Bundestag.

However, more than one-third of seats in the incoming Bundestag are set to be taken by the far-right Alternative for Germany (AfD) and The Left, two parties that the CDU/CSU bloc has ruled out working with.

This has led to suggestions that conservative leader Friedrich Merz – the country’s presumptive next chancellor – could call a special session of the outgoing Bundestag to rush through the reforms before the next parliament meets.

However, the move would still require support from either the Greens or the free-market Free Democrats, leaving Merz with very little room for manoeuvre.