Published by Global Banking & Finance Review®
Posted on February 24, 2025
2 min readLast updated: January 26, 2026
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Germany's Bundesbank supports raising the deficit cap amid low debt, emphasizing the need for infrastructure and defense investment.
FRANKFURT (Reuters) - Germany's central bank on Monday backed raising a cap on the government's deficit at a time when public debt is low and there is a need for investment in infrastructure and defence.
This so called debt brake, which limits public deficits to 0.35% of gross domestic product, was the key economic topic of Germany's election campaign and the country's likely next chancellor, Friedrich Merz, has talked about reforming it.
The Bundesbank, traditionally a bastion of conservative economic thinking, also saw scope for adapting the debt brake "to changing conditions", it said in its monthly report.
"Binding fiscal rules such as the debt brake make a very important contribution to ensuring solid state finances," it said. "In principle, however, it is entirely justifiable to adapt the debt brake's borrowing limit to changing conditions when the public debt ratio is low."
The Frankfurt-based central bank, which does not have a say in fiscal matters but is deeply respected within the country, cautioned that "higher (deficit) ceilings" must be binding and "in line with solid state finances".
"And even then, it remains essential to review priorities and use financial resources more effectively in order to better align fiscal policy with the challenges," it added.
It said there was a need for "action" in public infrastructure and defence spending but the tax burden and spending ratios were already relatively high.
Europe's largest economy has shrunk for two straight years and appears increasingly in need of an overhaul if it is to compete with China and the United States.
The Bundesbank said the German economy may eke out some modest growth in the three months to March but it remains mired in stagnation as threats of U.S. tariffs dampen global economic activity.
(Reporting By Francesco Canepa; Editing by Hugh Lawson)
The current cap on Germany's public deficit is limited to 0.35% of gross domestic product.
The Bundesbank suggests that there is scope for adapting the debt brake to changing conditions, emphasizing the importance of binding fiscal rules.
The Bundesbank identifies public infrastructure and defense spending as areas in need of action, despite the already high tax burden and spending ratios.
The German economy has experienced shrinkage for two consecutive years and is currently mired in stagnation, with modest growth expected in the near future.
Threats of U.S. tariffs are dampening global economic activity, which is impacting Germany's economic performance.
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