Understand Germany’s paralysis in a word: the term Schulden, which means debt. He shares his root with the word Schuldig, which translates into culprit (1). Everything is summarized, and yet after more than two years of political debate, the fall of the coalition of Chancellor Scholz in power, an economy at the end, the future German government which will come out of the ballot box on February 23 is about to do the ‘Unthinkable: loosen the famous brake on debt, inscribed in gold letters in the Constitution.
For a long time, our neighbors have sworn Urbi and Orbi that you shouldn’t go into debt. Because, as the electoral manifesto of the CDU still specifies today, the party largely in mind in the polls, “today’s debts are the tax increases of tomorrow”. A logic that is verified every day in France, but on the German side, the emergency has changed camp. Pamoors, bankers, industrialists, all are now convinced, it is necessary to loosen the brake on debt, which, since 2009, has caps the structural deficit at 0.35 % of GDP. More than 1 in 2 Germans is now favorable to this softening. The very likely future Chancellor, Friedrich Merz, Christian Democratic candidate, himself admitted lips that he was “possible to speak” of a reform of this brass rule.
So much the better for the German economy, in full recession. It must be said that unlike Paris, Berlin has considerable margins: its debt rate does not exceed 62.4 % of GDP, only half of the French level. Reverse of the medal, Germany has one of the lowest public investment levels in the OECD. By consenting to resorting (a little) to debt, it can finally start to respond to an ever longer list of priorities: repairing its transport infrastructure, launching a large digitalization plan in the public sector, developing electrification of the electrification of the electrification of country. But also to finance its defense expenses, to deal with Trump’s trade offensives, to prepare for the aging of the population … “It is undoubtedly the only lever which has not yet been activated and which could potentially bear fruit in the medium term “, estimates Christopher Dembik, investment strategy advisor at Pictet AM. “And if Germany is better, the rest of Europe will go better,” adds Shahin Vallée, researcher at the German Council for Foreign Affairs.
“Major change”
But you should not expect a miracle solution. The expected enlargement, the result of a compromise within the future coalition, risks being laughed. And “it will not transform the nature of an economy still phagocytized by the automotive sector, which is likely to stay on the decline for a long time”, specifies Christopher Dembik.
The fact remains that the turn that is about to negotiate Germany is not trivial. “In terms of intellectual and doctrinaire consensus, this is a major change”, judges Shahin Vallée. A bit like when, at another time, the Social Democratic Chancellor Helmut Schmidt professed: “The investments of today are the profits of tomorrow and the jobs of the day after tomorrow.”
(1) “The German Schuldenbremse” crisis, by Clara Bösche, Schuman Papers, January 29, 2024.