Billions Unlocked Through Relaxed Restrictions
Germany’s strict fiscal rules helped the country cushion the impact of critical events like the 2008 financial crisis and the COVID-19 pandemic. However, in recent years, they have contributed to economic decline. In an effort to restore the competitiveness of Europe’s largest economy, and amid growing geopolitical tensions, a majority of German politicians voted on March 18, 2025, to ease the fiscal brake that governs the ratio of public debt to GDP. The adjustment includes exempting defense spending—currently over 1 percent of GDP—from debt limits, extending the annual borrowing margin of 0.35 percent of GDP to include federal states (previously applicable only to the federal government), and creating a €500 billion investment fund. Over the next twelve years, these investments are intended to upgrade infrastructure such as roads, education, healthcare, and the energy sector. Since 2009, German federal states have been required to maintain a yearly deficit of no more than 0.35 percent of GDP. This conservative approach enabled Germany to keep its public debt at just under 63 percent in 2023. By comparison, this figure was significantly below the EU average of 91.6 percent, while in Italy it exceeded 134 percent, and in Greece it reached as high as 163.9 percent.
Against the Rules
According to the Financial Times, Germany could raise its debt ratio to as high as 86 percent without causing any significant negative impact on economic growth. However, loosening the debt brake results in rising public debt, a scenario directly at odds with European Union requirements. Under the updated EU fiscal rules that came into effect in April last year, member states with public debt exceeding 60 percent must present a plan to gradually reduce it, while keeping their annual budget deficit within a 3 percent threshold.
Impact on the EU
As reported by Vanguard, Germany’s deficit could rise to 1.5 percetn by next year under a reasonable baseline scenario. This would potentially boost the country’s GDP—as well as that of the entire euro area—by around 0.4 to 0.5 percentage points. Additionally, early March discussions around potential approval of Germany’s debt reform led to a sharp increase in yields on 10-year German government bonds. Continued growth in bond yields could hinder further interest rate cuts in Europe and worsen the debt burden for already indebted countries like Italy and Greece.
Boosting Dynamics in Europe
On the other hand, it is important to mention the positive aspects as well. The release of financial resources and their proper allocation could bring economic benefits to Germany. Increased investments in critical sectors will support production, demand for German products abroad, and thus export growth. Likewise, Germany's trading partners will benefit, as they may experience higher demand for their products. For example, according to economist Jan Bureš of the Patria Finance portal, the GDP of the Czech Republic, whose export and import to Germany accounted for 32 and 21 percent respectively last year, is expected to rise slightly by around 0.5 percent. Tomáš Pojar, the Czech Republic's national security advisor, expects the biggest benefits in the automotive, defense, and construction sectors, according to ČTK. This could also be positive for Slovakia, whose largest trading partner is Germany, with a 21 percent share of exports and a 17 percent share of imports. The exemption related to defense spending could positively impact German companies such as Rheinmetall, the largest manufacturer in the defense sector, or industrial giant ThyssenKrupp. A long-term challenge for Germany could be the tariffs of tens of percent imposed by Donald Trump on the European Union. Due to these, German Finance Minister Jörg Kukies estimates a 15 percent decline in exports from the country.
