THE STATE
Recap: Debt for Germany - What is the black-red-green financial package good for?
On the eve of the Bundestag vote, we discussed the planned financial package and the constitutional amendment with Katharina Beck, Philippa Sigl-Glöckner, Sebastian Dullien, Armin Steinbach and Mark Schieritz.
BY
DAVID KLÄFFLINGPUBLISHED
18. MARCH 2025
The Bundestag today passed a far-reaching amendment to the debt brake in the German Basic Law. This reform makes it possible to exempt certain defence spending as well as investments in infrastructure and climate protection from the debt rule. In addition, the federal states will be given more fiscal leeway when drawing up their budgets.
Yesterday evening, we discussed the effects of the amendment to the Basic Law with a panel of experts as part of the New Economy Short Cut format. The panellists were Katharina Beck, financial policy spokesperson for the Bündnis 90/Die Grünen parliamentary group, Philippa Sigl-Glöckner, Director at Dezernat Zukunft, Sebastian Dullien, Scientific Director at Macroeconomic Policy Institut (IMK), and Armin Steinbach, Professor of Public Law and Economics at HEC Paris, former division head at the Federal Ministry of Finance. The discussion was moderated by Mark Schieritz, Deputy Head of the Politics Department, Die Zeit.
The three central elements of the reform
1. Defence spending exempt from the debt brake
Defence spending above one percent of GDP will no longer count towards the debt brake. This also includes civil defence and military aid for Ukraine. Particularly noteworthy: this exception is unlimited in time – a first in German budgetary history.
2. Special funds of 500 billion euros for infrastructure and climate protection
A large part of the new regulation concerns the financing of infrastructure projects and climate protection measures. The special fund is distributed as follows:
- 100 billion euros for the federal states
- 100 billion euros for the climate and transformation fund
- The remaining amount is to be channelled into ‘additional’ infrastructure investments, defined as investments that are 10% above the previous investment level.
3. Fiscal leeway for the federal states
The federal states will have the option of reporting a structural deficit of 0.35% of GDP (instead of adhering to balanced budgets).
The plan was generally welcomed, as it will result in a functioning federal budget, which will form the basis of business for the new federal government, and important investments in German and European security (and infrastructure) can be made.
What I see more critically is that it is super complex. I don't think such things belong in the Basic Law at all. In the future, we won't be planning budgets according to what makes sense, but rather navigating the hats so that as much money as possible comes out... My hope would be that we don't just optimise according to rules, but as sensibly and efficiently as possible.
Katharina Beck emphasised that the agreement to reform the debt brake was crucial despite its imperfections. For example, the additionality criterion and the expansion of the broad concept of security were opposing but should be understood as part of the compromise.
Negotiations could have continued until Sunday. But that would have made this already questionable procedure more difficult from a constitutional point of view. We are concerned with Europe's security. It is an important sign that Putin cannot work out when a special fund has been exhausted.
Sebastian Dullien emphasised the positive impetus for growth that would come from the additional investment. This is an opportunity for a lasting end to economic stagnation. The IMK is therefore forecasting a positive effect on growth in the coming year, even despite Trump’s tariffs. Two questions are decisive for the consequences of the reform. Firstly, can we afford it? In other words, is government debt sustainability guaranteed? And secondly, can we implement it? In other words, can the additional money be absorbed by the system without merely increasing prices? According to Dullien, both would be possible.
However, everyone agreed that the EU debt rules (as the ‘forgotten brake’) are now the decisive constraint. According to the IMK forecast, deficits would rise above 3%, which under the Excessive Deficit Procedure would allow no room for manoeuvre at all. In the short term, a potential adjustment of EU rules on defence spending could allow for additional debt.
According to Armin Steinbach, the real bottleneck is therefore the special fund for infrastructure and climate protection. He also emphasised that a special German approach would come at a political cost to European partners. According to Steinbach, defence should therefore be organised as a joint European project and not nationally.
On the one hand, of course, it is again hara-kiri what is being done in the constitution. Enriched with foreign bodies, it was already atypical for a constitution in the past to attack the basic rules of the game with concepts such as economic components. It doesn't fit into the system, but you have to live with it. Of course, there is a lot of action in the explanatory memorandum to the law, for example the investment ratio or other definitions. A lot therefore depends on how this is now implemented in law.
The debate on the supply-side capacity limit was also taken up in the discussion, i.e. whether there would be a conflict of objectives in the use of real (non-financial) resources for defence vs. infrastructure. Sebastian Dullien and Philippa Sigl-Glöckner argued that the production potential is large enough to fulfil both objectives. Especially if previously unutilised potential (e.g. of women working part-time who would like to work more) were exploited.
Katharina Beck was also asked whether it would not have been better to pass a fundamental reform of the debt brake in the new Bundestag.
Politically, that's where we are now: Reform for defence and extensive special funds for infrastructure. Being quick was also more important to us in relation to Ukraine, even if I would have found it favourable if there hadn't been so much written into the Basic Law.