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The government collapsed over personal tensions, disappointing results in the opinion polls and different views on how to get the economy out of its current stagnation and structural weakness. The different economic policy ideas will therefore very likely play an important role at the upcoming elections on 23 February 2025. Differences will mainly occur on how and where to cut expenditures and how to finance or incentivise investments.
Reaching the debt brake during the economic good times of the 2010s was achieved via low interest rate payments and reduced investments. As a result, the economy has fallen behind in important fields like infrastructure, digitalisation and education – often traditional public goods. Of course, it is not only about public investment, as private investment plays a far bigger role. But without public goods and public incentives, there won’t be private sector investments. Currently, the investment gap in Germany is estimated to be some 600bn euro, or some 15% of GDP. Also, add to this another 30bn euro per year, which would be needed to bring German defence spending to the 2% of GDP target. The closing of such a gap will never be achieved by only cutting expenditures. Consequently, any serious effort to fundamentally reform and improve the German economy will have to come with fiscal stimulus. Stimulus that would also benefit the debt-to-GDP ratio as in the German debate very often the denominator is overlooked. Debt ratios can also come down when GDP growth picks up.
Any serious efforts to fundamentally reform and improve the German economy will have to come with fiscal stimulus
Whether the debt brake will be officially changed after the elections remains unclear at present. Interestingly, the CDU has started to make some moves, in our view paving the way for investment-related fiscal stimulus after the elections. As official changes can only be made with a two-thirds majority in parliament, everything will depend on the results for the AfD and the FDP, probably the only two parties left with a very rigid opposition against changes to the debt brake. According to current polls, the two parties together could get some 25% of the votes, with the FDP still at risk of not making it into parliament at all.
In any case, whether there are official changes to the debt brake, following proposals like a golden rule for (defence) investments, a higher structural deficit or a longer exemption period for the sake of infrastructure investments, or whether any new government would opt for other tools, doesn’t matter. Fiscal stimulus is here to come. Other financing tools could still include the so-called Sondervermögen (special purpose vehicles). Contrary to public belief, the Constitutional Court didn’t prohibit these vehicles but only ruled against shifting money from one to the other. A special purpose vehicle to finance an infrastructure and digitalisation modernisation programme could be possible.
Taking the 600bn euro investment gap as a starting point, this would mean more than 1.5% GDP additional fiscal stimulus over the next ten years.
When any next government has to decide on the future path for the economy, there are simply two options: structural reforms and investment via austerity or structural reforms via investment and looser fiscal policies. In all honesty, it’s not a difficult choice. And with looser fiscal policy and a reform and investment agenda, it could be time for Europe to dust off another German word often used: Leitmotiv.