Merz Tightens Germany’s Spending Gate

Every new euro Germany spends must bring the public debt ratio down. Not keep it steady. Bring it down. That is the CDU’s condition for changing Germany’s debt brake, the constitutional limit on government borrowing. Friedrich Merz has also made the politics plain: any change needs two-thirds majorities in both chambers of parliament (FAZ, Reuters). For Malta, this is not a distant German quarrel. Germany is the eurozone’s largest economy. When Berlin decides how much it is prepared to borrow, the effect reaches every country that trades, invests, or negotiates inside the single currency.

How the ratio works, and who it favours

Germany’s debt brake, the Schuldenbremse, caps the federal structural deficit — the budget gap adjusted for the economic cycle — at 0.35% of GDP (German Basic Law, Bundesbank). The CDU wants that cap to remain while debt is above 60% of GDP. Defence spending, now treated as exceptional, would return to the ordinary budget by the early 2030s (t-online).

The debt ratio is total public debt measured against the size of the economy. It can fall even when borrowing rises in euro terms, as long as the economy grows faster than the debt. So the CDU’s test does not ban all new spending. It does something more selective: every proposal has to answer one question. Will this make the ratio fall?

Germany can pass that test more easily than most. It borrows cheaply, its economy is large enough for growth to absorb moderate new debt, and it has already created large 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 cannot play the same game. According to LeaseNews, its debt ratio is estimated at 138.5% of GDP by 2026, with a deficit above 3%, keeping it under EU fiscal surveillance. Its main investment vehicle is the €194.4 billion recovery plan, the PNRR, and more than 63% of it consists of loans rather than grants (Business.it). Germany invests on its own balance sheet. Italy borrows through Europe and repays.

Where this squeezes European investment

Germany’s fiscal restraint matters to the rest of Europe in two practical ways. First, Germany sits at the centre of European supply chains. When Berlin delays public investment, suppliers across the EU lose orders (European Commission). For a small economy such as Malta, the effect is less visible than a direct cut in EU funds, but it still works through demand, confidence, and the wider eurozone cycle.

The larger constraint is political: who is allowed to borrow for European projects. If Berlin treats debt restraint as a constitutional principle 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 (European Commission). French analysts at Ifri put the contradiction clearly: Germany opens national fiscal space for German priorities while resisting similar ambition at EU level (Ifri).

That matters for countries without Germany’s fiscal room. Malta has used EU funding to reshape infrastructure, from roads and waste systems to projects felt in everyday life between Il-Belt, the harbour towns and the outer localities. A Europe that cannot borrow jointly leaves smaller and more indebted states relying more heavily on national budgets, even when the projects serve a common European need.

The Draghi competitiveness report puts Europe’s additional investment needs at roughly €800 billion per year (Draghi report). Tinkering at the edges of national budgets will not produce that sum. EU-level borrowing, the kind that lets countries such as Italy invest without worsening their own debt ratios, would help close the gap. Germany’s current answer is conditional: not if the ratio rises.

The word that does the most work

The CDU’s formula is not nonsense. The IMF has warned that fiscal buffers matter when interest costs are rising and future shocks remain likely (IMF). IMK research has also found that borrowing for public investment can lower the debt ratio over time, if the spending raises economic output enough (Finanznachrichten/IMK).

The decisive word is investment. Germany’s test asks whether spending lowers the debt ratio. The answer depends on whether that spending raises future GDP. Nobody in Berlin, Paris or Rome has yet produced a project-level account of which euros qualify and which are ordinary spending renamed as investment.

Germany’s debt-ratio test is defensible only if Berlin applies to its own carve-outs the same standard it demands for EU-level spending. So far, it has not.