Germany has long been one of the most fiscally disciplined countries in the EU, with a public debt-to-GDP ratio of 62.9% in 2023, well below the eurozone average of 91.6%. By comparison, France had a debt ratio of 109.9% of GDP in 2023, Italy 134.8% and Greece even 163.9%. This relatively low debt was the result of tight fiscal policy, the main instrument of which is the so-called debt brake (Schuldenbremse), which was introduced in 2009. The debt brake limits the federal budget deficit to a maximum of 0.35% of GDP per year, while obliging the Länder to maintain balanced budgets. This mechanism helped Germany to reduce its debt after the 2008 financial crisis and maintain sound public finances, although the debt brake had to be temporarily suspended during the covid-19 pandemic to finance large-scale rescue programmes.

However, despite relatively low debt levels, Germany has faced economic problems in recent years. Industrial production is around 10% below pre-pandemic levels and German companies are losing competitiveness on international markets. This has led to an intense debate on whether Germany should relax fiscal policy and invest more in infrastructure, defence and the modernisation of the economy. Critics of the debt brake argue that its rigidity prevents Germany from responding adequately to current challenges such as decarbonising industry, digitalisation and ensuring energy security. The federal government is therefore looking for ways to increase investment without officially breaking the rules of fiscal discipline.

According to recent economic analyses, Germany could afford to increase its public debt to 86% of GDP without damaging economic growth or worsening its financial stability, the Financial Times reported. This would mean the possibility of raising additional funds of up to €1.9 trillion, which could be used for key investments. Priority areas include modernising transport and energy infrastructure, boosting the defence budget in response to the changed geopolitical situation and promoting innovation in high-tech sectors such as artificial intelligence and microelectronics. The German government is aware that without these investments its position as a European economic power is at risk of being weakened.

The debate on the future of the debt brake thus remains a key issue in German politics. Although there are mechanisms in place to temporarily suspend it in the event of crises, the governing coalition is divided on whether the rules should be softened in the long term. Conservative economists warn that too much debt could limit Germany's room for manoeuvre in the future, while advocates of loosening fiscal policy argue that without more public investment, the German economy will not be able to recover and compete in the long term with growing economies such as China and the US. The future of German fiscal policy will thus depend on political decisions in the coming years and the government's ability to strike a balance between maintaining fiscal discipline and promoting economic growth.

But higher debt is not free. Considerations of easing the debt brake have significantly increased government bond yields. The yield on the 10-year German bund rose by 50 basis points to 2.9% during March. It was last higher in 2011 during the debt crisis in several European countries. The problem is that other European countries are similarly considering higher debt levels due to the need for increased defence spending. And sovereign bond yields, or long-term interest rates, are thus rising across Europe, even as the ECB eases monetary policy. Remember the crowding-out effect of sovereign investment mentioned in economics textbooks?