The Berlin Summit 2025: Leaving German austerity behind – a new fiscal age for Europe?

The panel brought together four prominent economists—Christian Kastrop, Jérôme Creel, Holger Schmieding, and Nacho Alvarez— with diverging views on whether Europe’s fiscal rules need fundamental structural reform or can be adapted within the existing framework.

Christian Kastrop, once a chief architect of Germany’s debt brake (Schuldenbremse), now President and CEO of Global Solutions Initiative, opened the discussion with a historical and reflective perspective. He acknowledged that while the original intention behind the debt brake was to enforce fiscal discipline, its application over the past decade has lacked flexibility. Crucially, he emphasized that the rule was “never carved in stone” and could be adapted to evolving economic realities. Kastrop argued that the problem was not he rule per se but rather how the political economy chose to apply it. He welcomed Germany’s recent constitutional exceptions for military spending and infrastructure investment as signs that fiscal orthodoxy is giving way to more adaptive policymaking. Going forward, he called for better rules that reflect today’s geopolitical and economic context—including the need for green and digital investments.

Jérôme Creel, Director of Research at OFCE  and associate professor at ESCP, analyzed whether Germany’s fiscal stimulus would work and whether it could catalyze broader European reform. Drawing on academic literature, he identified five conditions under which fiscal policy is effective: policy certainty, coordinated monetary policy, business cycle timing, absorptive capacity, and European Commission compliance.

Creel warned that current geopolitical and monetary uncertainties—particularly concerning ECB reactions—could reduce the multiplier effects of German stimulus. However, he saw potential for positive spillovers across the eurozone, especially if Germany’s public investment boosts confidence and growth.

Creel also cautioned that while Germany may bypass fiscal rules due to its capacity and credibility, other countries like France cannot afford such latitude. France’s fiscal deficit and weakened public services make broad fiscal expansion untenable without structural reforms or new revenue streams. He concluded that reforming the European rules was necessary, but complicated by inconsistent enforcement and a lack of clarity.

Holger Schmieding, Chief Economist at Berenberg Bank, offered a pragmatic and cautiously optimistic take. He welcomed Germany’s fiscal U-turn as both necessary and potentially effective. Unlike previous one-off stimulus packages, he stressed that the staggered, multi-year nature of the new spending plans could boost output rather than fuel inflation.

He noted that while China poses a challenge to Germany’s export model, intra-European and U.S. trade shares are rising. The key issue, he argued, is enabling small and medium-sized enterprises to invest and create jobs domestically. Schmieding also emphasized that Germany’s current flexibility stems not from austerity but from years of robust employment growth and fiscal prudence.

On the broader European fiscal framework, he doubted that Germany or the EU would soon adopt major treaty changes. However, he predicted a pragmatic application of existing rules, particularly in the face of geopolitical priorities like supporting Ukraine. He also warned that while Brussels may turn a blind eye to rule-bending, financial markets—the “bond vigilantes”—could impose their own discipline.

Nacho Alvarez, former Spanish Secretary of State for Social Rights and professor of economics at the Autonomous University of Madrid, presented Spain as a case study in successful fiscal transformation. Drawing a contrast with Spain’s post-2008 austerity policies, he detailed the country’s shift toward expansionary fiscal policy, wage increases, and industrial re-regulation in the wake of the COVID-19 crisis.

These policies, Alvarez argued, helped Spain recover pre-pandemic GDP within 18 months and create over 2 million jobs. Contrary to critics’ warnings, raising the minimum wage and strengthening collective bargaining did not harm corporate profits or fiscal stability. Instead, strong consumption and investment drove growth while reducing the deficit.

Alvarez contended that fiscal space can sometimes be created through progressive taxation and prudent spending. He urged a focus not only on how much is spent, but also on what is financed. For long-term investment—especially in climate and digital infrastructure—he supported a permanent Eurobond mechanism. While he acknowledged that large-scale EU reforms are politically difficult, he saw value in reinterpreting current rules to allow for golden rules and public investment exemptions.

What Comes Next?

The panel agreed that Germany’s fiscal pivot marks a break with the past. But the speakers disagreed on how far the shift could or should go—especially in terms of reshaping EU-wide rules and institutions: Kastrop and Schmieding saw political and legal obstacles to a large-scale European fiscal capacity but supported targeted reforms and more flexible rule application, Creel urged deeper structural reforms at the EU level and Alvarez emphasized the importance of progressive taxation and using fiscal tools to transform the economy, not just to stabilize it.

While the outlook for treaty reform appears limited, panelists proposed pragmatic adjustments: making the German infrastructure fund permanent, embedding macroeconomic logic into fiscal rules, and reinterpreting constraints to allow for strategic investment. Whether the German fiscal turn will lead to a more resilient and investment-oriented Europe remains to be seen.