Germany’s Debt Brake is Really a Red Herring
The German economy is weak not because of a lack of investment, but because of the sectors it goes into. German industry has specialised in mid-tech sectors, like automotive, that are now under increasing competitive pressure from China. A commentary by Daniel Gros
Shahin Vallée’s op-ed on Germany’s debt brake (January 30) is yet another example of the popular narrative that the constitutional provision in Germany to limit the deficit, in normal times, to 0.35 percent of GDP is the main obstacle to prosperity.
A first charge leveled against the debt brake is that it impeded spending on infrastructure in the past (making it responsible for the sorry state of German infrastructure today).
A second one is that today it would not allow the government to engage in deficit spending on military and industrial policy.
As Vallée rightly noted, public sector infrastructure spending was too low even when the debt brake was not biting.
The main obstacle for higher spending was in reality insufficient planning and administrative capacity at the regional level (where most spending takes place) combined with pervasive popular resistance to any new road or rail project.
Modifying the debt brake to allow for more government investment would also not address the second charge since even the most creative accounting cannot transform spending on the military, or on industrial subsidies, into investment.
As for private sector investment, the German business sector is investing as much as the EU average (around 21 percent of GDP).
The economy is weak not because of a lack of investment, but because of the sectors it goes into. German industry has specialised in mid-tech sectors, like automotive, that are now under increasing competitive pressure from China.
Massive investment in high-tech sectors that could drive a recovery of the German economy is certainly desirable, but it can come only from the private sector.
Denmark, Europe’s champion in high-tech has been running budget surpluses for years. Loosening the debt brake to allow for more deficit spending on the industrial subsidies will not bring back prosperity to Germany.
This letter was published in the Financial Times on January 31, 2025.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
