Merz Ties Spending To Lower Debt

Friedrich Merz has put a hard condition on any further loosening of Germany's debt brake: every euro of new spending must push the public debt ratio down. Holding it steady will not be enough. That is the price the CDU is attaching to reform of the Schuldenbremse, the constitutional borrowing limit that shapes German budgets and, by extension, much of the eurozone's fiscal room. Any change needs two-thirds majorities in both chambers of parliament, which gives Merz's party real leverage (FAZ, Reuters).

This might look like a domestic row in Berlin. It is not. Germany is the eurozone's largest economy, and when it decides how much the state can borrow, the consequences travel through the single market. Ireland has learned that lesson in different forms: through the euro crisis, through ECB interest-rate cycles, and through the simple fact that a German slowdown rarely stays German for long.

How the ratio works, and who it favours

The debt brake caps Germany's federal structural deficit, meaning the deficit adjusted for the ups and downs of the economic cycle, at 0.35% of GDP (German Basic Law, Bundesbank). The CDU wants that cap kept in place while public debt remains above 60% of GDP. Defence spending, now treated as exceptional, would be folded back into the normal budget by the early 2030s (t-online).

The ratio matters because it is not the same as the cash amount of debt. Public debt can rise in euro terms while the debt ratio falls, provided the economy grows faster than the borrowing. Merz's test therefore does not ban all new spending. It asks a narrower and more revealing question: will this make the economy large enough, quickly enough, to reduce debt as a share of national output?

Germany can answer that question from a position of strength. It borrows cheaply, has a large economy capable of absorbing moderate new debt, and has already created substantial national exceptions for defence and infrastructure. BNP Paribas estimated that Germany's 2025 investment push could add roughly 0.7 percentage points to growth in 2026 (BNP Paribas).

Italy faces a different arithmetic. Its debt ratio is estimated at 138.5% of GDP by 2026, with a deficit above 3%, leaving it under EU fiscal surveillance (LeaseNews). Its main investment instrument is the €194.4 billion recovery plan, the PNRR, and more than 63% of that is loans rather than grants (Business.it). Germany invests on its own balance sheet. Italy borrows through Europe and repays.

Where this squeezes European investment

German restraint reaches the rest of Europe in two ways. The first is practical. Germany sits at the centre of European supply chains, so when it postpones public investment, companies elsewhere lose orders too (European Commission). For Ireland, the exposure is not only trade in goods. A weaker German cycle also feeds into confidence, investment plans and demand across the wider single market.

The second channel is political, and more important. If Berlin treats debt restraint as a constitutional rule at home, it is unlikely to support large-scale joint EU borrowing. The Commission's proposed 2028-2034 long-term budget needs unanimous approval, which gives Germany an effective veto over any move in that direction (European Commission). Analysts at Ifri have put the contradiction plainly: Germany is opening national fiscal space for German priorities while resisting the same scale of ambition at EU level (Ifri).

That matters because Europe's investment gap is not small. The Draghi competitiveness report estimates additional needs at roughly €800 billion per year (Draghi report). Trimming existing budgets will not get Europe close to that figure. EU-level borrowing, of the kind that would let countries such as Italy invest without loading more debt onto their own national accounts, is one route towards closing it. Germany's present answer is that the ratio must come first.

The word that does the most work

The CDU's position is not foolish. The IMF has warned that fiscal buffers matter when interest costs are rising and future shocks are likely (IMF). Research from IMK found that borrowing for public investment can still reduce the debt ratio over time, if the spending raises output sufficiently (Finanznachrichten/IMK).

The hard word is "investment". Merz's test asks whether spending lowers the debt ratio, but the answer depends on whether the money genuinely raises future growth. Berlin, Paris and Rome have yet to produce a project-level account of which euros meet that test and which are ordinary spending wearing an investment label. Germany's debt-ratio rule is defensible only if Berlin applies it to its own carve-outs as strictly as it applies it to European borrowing. So far, it has not.