Published 01 April 2025
Almost a month in the making, Germany’s parliament, the Bundestag, voted two weeks ago to scrap its "debt brake," a fiscal rule enshrined in the constitution to ensure German macro prudence but straitjacketed Berlin’s spending on defense and infrastructure. At the heart of this change is a rare window for Germany and its newly elected Chancellor, Friedrich Merz, to transform Europe — and Germany's leadership of it — amid deepening transatlantic fissures.
For all its economic power, Germany has for decades preferred to operate in the shadows. Constrained by their country’s troubled history, German leaders eschew posturing on the global stage. Like so much else about our world today, this is now changing.
Even before taking office, Friedrich Merz, the newly elected German Chancellor, swept aside established German political doctrines regarding budgetary probity and rearmament. He boldly declared his goal was to reposition Germany and the European Union to better address the menacing new reality. The catalyst of all this was, of course, Donald Trump. It’s not just the US President’s stance on Ukraine and NATO that worries Berlin and Brussels; his proposed reciprocal tariffs are threatening the German economy, which has already endured two years of recession.
Germany’s economic decline stems from its inability to adapt to shifts in the global economy. Debt financing has not worked well for the country’s tech sector, where startups often lack the physical assets traditionally used by large manufacturers as collateral for bank loans. The higher cost of capital and the more risk-averse nature of EU investors meant a relative scarcity of capital for European companies. This depressed research and development expenditure and productivity.
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For years, economists have urged Berlin to change its mindset on tight budgets and turbocharge the German and European economies out of the doldrums. Merz heeded this call by overturning nearly two decades of budgetary restraint by lifting the "debt brake," a constitutional limit on borrowing, after intense domestic political haggling. This revision allows for significant investments in defense and infrastructure, including a €500 billion (US$540 billion) fund over ten years. So far, market reactions have been extremely positive.
As the biggest and most creditworthy economy in the EU, German resistance to debt sharing across a remarkably diverse 27-member state union has had a stifling effect on making deeper pools of cash available for investment. But a series of shocks, notably the pandemic and the war in Ukraine, changed Berlin’s calculus. The pandemic spawned two major lending programs, which provided financing of up to €100 billion (US$107.5 billion), and the €724 billion (US$778 billion) Recovery and Resilience Facility (RRF). In March, the European Commission announced plans for the €800 billion (US$860 billion) ReArm Europe Fund. With the debt brake lifted and a new openness to EU-wide capital, new avenues have been opened to reignite the inextricably linked economies of Germany and the EU.
Yet, if one speaks to German businesses, they will tell you that the real problem affecting the German economy is regulatory excess. Bureaucratic processes, such as licensing and supply chain due diligence, are criticized for slowing down business operations. Smaller companies are particularly affected by these red tapes, which are compounded by EU-wide directives.
The challenges facing Germany and its new chancellor are formidable. Europeans must be convinced that greater integration would enable the continent to defend itself economically and militarily. It is a tall order to ask of a postwar German chancellor that he lead Europe. But circumstances today dictate that Berlin, and the other capitals of Europe, set this discomfort aside.
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Author
Keith M. Rockwell
Keith M. Rockwell is a Senior Research Fellow at the Hinrich Foundation. Prior to his retirement in June 2022, Keith served as a Director at the World Trade Organization (WTO) and spokesperson for the organization for more than 25 years. He also is Global Fellow at the Wilson Center.
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