As Germans prepare to head to the polls this Sunday, the country's sluggish economic growth and fiscal policies are at the forefront of voters' concerns. The Alternative for Germany (AfD) has surged in popularity, capitalizing on an anti-immigration platform, while Friedrich Merz's conservative Christian Democratic Union (CDU) emerges as the frontrunner to become the largest party in parliament. With industrial employment declining and an ageing population, the upcoming election could redefine Germany's economic strategy.
The CDU's path to governance involves forming a coalition with one or two parties currently in Chancellor Olaf Scholz's government—the Social Democratic Party (SPD) and the Greens. As Germany grapples with a shrinking economy for the second consecutive year, political leaders are questioning whether the current fiscal policies, including the "Schuldenbremse" or debt brake, might be constraining necessary investments to stimulate growth.
Germany's debt brake policy limits the federal government's new borrowing to 0.35 percent of the nation's GDP. This rule is intended to maintain fiscal discipline but has drawn criticism for potentially stifling public investment, which has remained relatively low compared to other nations in the region. The International Monetary Fund (IMF), however, does not view debt sustainability as an immediate threat for Berlin, suggesting that there might be room for adjustments.
Carsten Brzeski, global head of macro research at ING, has voiced the necessity of fiscal stimulus in any serious efforts to reform and enhance the German economy.
"Any serious efforts to fundamentally reform and improve the German economy will have to come with fiscal stimulus," – Carsten Brzeski, global head of macro research at the Dutch bank ING.
Brzeski further illustrates the challenge of implementing all required policies within strict austerity measures.
"Finding the fiscal space for all the required policies exclusively in austerity looks like a mission impossible." – Carsten Brzeski, global head of macro research at the Dutch bank ING.
Friedrich Merz has acknowledged potential reforms to the debt brake but emphasizes the need for clarity on objectives.
"Of course, it can be reformed," – Friedrich Merz, conservative Christian Democratic Union (CDU) leader.
Merz questions the purpose behind any proposed changes, indicating that any decision on reform should be carefully considered.
"The question is why, for what purpose," – Friedrich Merz, conservative Christian Democratic Union (CDU) leader.
"then the answer may be different," – Friedrich Merz, conservative Christian Democratic Union (CDU) leader.
For any amendments to the debt brake rule, a significant legislative hurdle exists—a two-thirds majority is required in both houses of parliament. This adds complexity to potential fiscal reforms, especially given opposition from both the AfD and the Free Democratic Party (FDP). These parties have expressed reservations about altering fiscal constraints without clear benefits.
The need for public investment is accentuated by Germany's numerous structural challenges, projected to cost approximately 600 billion euros ($628 billion) by 2030. Despite this hefty price tag, public investment has lingered at around 2 to 3 percent of GDP in recent years. Germany's central bank has advocated for minor adjustments to the fiscal mechanism that would allow slight increases in borrowing, potentially facilitating economic growth.
Germany's demographic shift also poses a significant challenge for policymakers. The population is ageing rapidly, with projections indicating that by 2050, those over 64 will increase by 41 percent to reach 24 million people. This demographic change necessitates strategic investments in healthcare and pensions, further straining fiscal resources.
As voters weigh their options, economic growth remains a paramount concern. The CDU's leadership under Merz promises potential shifts in economic and fiscal policy direction. However, forming a coalition with parties holding differing views on fiscal reform could prove challenging. The SPD and Greens may have contrasting priorities compared to Merz's CDU, potentially complicating budget negotiations for this year and 2026.
