German balanced budget amendment

Based on Wikipedia: German balanced budget amendment

The Constitutional Straitjacket That Nearly Broke Germany

In March 2025, the German parliament faced a race against the clock. Friedrich Merz, the incoming chancellor, needed to ram through a constitutional amendment before the new legislature convened—because once it did, fringe parties would gain enough seats to block any changes. The target of this legislative sprint? A sixteen-year-old fiscal rule that had become, depending on whom you asked, either the bedrock of German economic responsibility or a self-imposed shackle strangling the country's future.

They call it the Schuldenbremse. The debt brake.

And its story reveals something profound about how democracies try to constrain their own worst impulses—and what happens when those constraints collide with reality.

Why Would a Country Tie Its Own Hands?

To understand the debt brake, you need to understand what problem it was trying to solve. In 2009, Germany was staring at a debt-to-GDP ratio that had crept above sixty percent—the threshold set by the Maastricht Treaty, the foundational agreement of European monetary union. This wasn't supposed to happen to Germany, the continent's fiscal disciplinarian, the country that lectured Greece and Italy about living within their means.

Two forces had pushed Germany past that threshold. First, reunification. When the Berlin Wall fell in 1989, West Germany absorbed a communist state with crumbling infrastructure, obsolete industries, and a population that needed to be integrated into a modern economy. The bill was staggering—estimates suggest it cost over two trillion euros over the following decades. Second, the Great Recession of 2008 had cratered tax revenues just as governments worldwide were spending heavily to prevent economic collapse.

So Angela Merkel's government proposed something radical: a constitutional amendment that would legally forbid the government from running significant deficits. Not just a policy. Not just a promise. An actual change to the Basic Law—Germany's constitution—that would bind current and future governments alike.

The mechanics are straightforward. The federal government cannot run a structural deficit exceeding 0.35 percent of Gross Domestic Product (GDP). A structural deficit means the underlying gap between spending and revenue, stripped of temporary fluctuations caused by economic booms or busts. If the economy shrinks and tax revenues automatically fall, that's not counted against the limit. But if politicians simply decide to spend more than they collect, even slightly, that's unconstitutional.

For the German states—the Länder—the rule was even stricter. After 2020, they were prohibited from borrowing at all.

The Philosophy Behind the Rule

The debt brake didn't emerge from nowhere. It reflects a distinctly German school of economic thought called ordoliberalism—a philosophy that sounds contradictory to American ears, combining "order" with "liberalism." Developed by German economists in the 1930s and 1940s, partly in reaction to both Nazi central planning and the chaos of the Weimar Republic, ordoliberalism holds that free markets require a strong framework of rules to function properly.

This isn't the Anglo-American libertarian vision where the best government is one that gets out of the way. Ordoliberals believe government must actively maintain the conditions for fair competition and prevent accumulations of power that distort markets. But—and this is crucial—they also believe government should bind itself with strict rules to prevent politicians from making short-term decisions that damage long-term stability.

Sound money and balanced budgets are core ordoliberal values. Inflation is viewed almost as a moral failing, a betrayal of savers and pensioners who trusted the currency. Government debt is seen as deferred taxation—a way for current voters to enjoy benefits they're forcing future generations to pay for.

From this perspective, the debt brake isn't an arbitrary constraint. It's an expression of intergenerational fairness. It's protection against the natural tendency of democracies to overpromise and underfund.

And It Worked—Sort Of

By the narrow metric it was designed to achieve, the debt brake succeeded brilliantly. Germany's debt-to-GDP ratio fell from over eighty percent after reunification costs and recession spending to 59.5 percent by 2019—just under the Maastricht threshold. The country ran balanced budgets and even surpluses. It accumulated no new debt. International creditors viewed German bonds as among the safest investments on Earth, allowing the government to borrow at the lowest interest rates in Europe.

Germany entered the COVID-19 pandemic in 2020 with a clean balance sheet, plenty of room to borrow, and credibility that less fiscally disciplined countries could only envy. When the pandemic hit, the government was able to suspend the debt brake—the constitution allows this during national emergencies—and spend heavily without spooking markets.

But beneath this apparent success, something troubling was happening.

The Infrastructure Slowly Crumbling

Drive across Germany today and you might notice something unexpected in Europe's largest economy: potholes. Delays. Construction sites that seem to last forever. The famous Deutsche Bahn, once a symbol of German engineering excellence, has become a punchline—trains routinely run late, and the network struggles to handle modern demands.

The numbers tell the story. For years, Germany invested less in its infrastructure than comparable European countries. Schools operated in buildings that hadn't been significantly upgraded in decades. Broadband internet, essential for a modern economy, lagged behind Estonia and Romania. Hospital equipment aged. Research facilities made do with outdated technology.

The debt brake didn't cause all of this. But critics argue it created a political environment where any new spending faced an almost insurmountable barrier. When the constitution says you can't borrow and taxes are politically difficult to raise, the path of least resistance is to defer maintenance, delay investments, and pretend the future will take care of itself.

In 2024, Danyal Bayaz, the finance minister of the state of Baden-Württemberg, made a pointed observation: Germany had squandered what he called the "globalization dividend" of the past fifteen years. During a period when interest rates were at historic lows—when borrowing was essentially free—Germany chose to pay down debt rather than invest in its future. Other countries built high-speed rail networks and fiber optic cables. Germany balanced its books.

The Constitutional Court Steps In

The debt brake's contradictions came to a head in November 2023, when Germany's Federal Constitutional Court issued a ruling that sent shockwaves through the government.

The backstory involves creative accounting. In 2021, as the pandemic waned, the ruling coalition—a three-party alliance of Social Democrats, Greens, and the Free Democrats known as the "traffic light" coalition for their party colors—faced a dilemma. They had ambitious plans for climate action and industrial transformation, but the debt brake was snapping back into force. Their solution was clever, perhaps too clever: they took sixty billion euros that had been authorized for pandemic response but never spent and redirected it to a Climate and Transformation Fund.

The conservative opposition, the Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU), challenged this maneuver. And the court agreed with them. The ruling was categorical: you cannot authorize borrowing for one emergency and then repurpose the money for entirely different goals. The pandemic exception was for the pandemic. Using it for climate investment was unconstitutional.

Overnight, the government lost sixty billion euros from its plans. The coalition scrambled to revise budgets, cut programs, and find new revenue sources. The political fallout was immense—contributing to the eventual collapse of the traffic light coalition and early elections in 2025.

But the ruling did something else. It forced Germans to have a genuine conversation about whether their constitution had locked them into a trap.

The Great Debate

Economists remain genuinely divided on the debt brake. A survey by the Ifo Institute in Munich—one of Germany's most respected economic research organizations—found that forty-eight percent of economics professors opposed reforming the debt brake, while forty-four percent supported reform. Six percent wanted to abolish it entirely. The remaining two percent were undecided.

This is not a settled question with a clear expert consensus on one side. It's an ongoing argument about fundamental tradeoffs.

Supporters argue that fiscal discipline is especially important for Germany because it anchors the eurozone. If Germany starts running large deficits, what moral authority does it have to demand fiscal responsibility from Italy or Greece? The entire European monetary system depends on Germany being the reliable adult in the room. Moreover, they point out that government investment doesn't have a great track record—politicians often fund projects based on political appeal rather than economic return. The debt brake forces hard prioritization.

Critics counter that the rule treats all debt as equally bad, ignoring the crucial distinction between borrowing to fund consumption (which truly does burden future generations) and borrowing to fund investment (which builds assets that future generations inherit). If you borrow a million euros for a party, you leave your children a bill. If you borrow a million euros to buy a house, you leave your children a house. The debt brake doesn't distinguish between these scenarios.

The German Council of Economic Experts—the country's official panel of economic advisors, sometimes called the "five wise men"—has proposed a middle path. They suggest making the debt brake more flexible: spreading deficit reduction over multiple years after emergencies, allowing higher deficits when debt levels are low, and improving how potential economic output is calculated. Reform, not abolition.

The Political Landscape

Where you stand on the debt brake in Germany tends to predict where you sit politically, though not always in obvious ways.

The CDU/CSU, the main center-right bloc, has historically been the debt brake's strongest defender. For conservatives, fiscal discipline is a core value—a commitment to sound governance and respect for future generations. The debt brake represents everything responsible about German economic management.

Or at least, that was the position until 2024. As Germany's economy stagnated and infrastructure concerns mounted, cracks appeared even in conservative ranks. Friedrich Merz, the CDU leader who would become chancellor, began quietly signaling openness to reform. Even Joachim Nagel, president of the Bundesbank—Germany's central bank, an institution with legendary inflation-hawkishness—called for reconsidering the rule.

The Free Democratic Party (FDP), classical liberals focused on business interests and low taxes, generally supports the debt brake but with reservations. They want fiscal responsibility but also recognize that starving infrastructure investments eventually hurts the private sector too. Their position is less ideological than pragmatic: balance the books, but don't let the country fall apart.

The Social Democratic Party (SPD), the center-left party of workers and unions, has grown increasingly critical. While some party traditionalists value fiscal credibility—particularly important after the party's founding father Willy Brandt was blamed for inflation in the 1970s—younger and more progressive factions argue the debt brake prevents necessary investment in education, healthcare, and green technology. The party's position has shifted from cautious support to reform advocacy.

The Greens are torn by their own internal tensions. Environmental investment requires massive government spending—decarbonizing an industrial economy doesn't come cheap. But the Greens also value sustainability, and unlimited debt isn't sustainable either. They've generally advocated for reform that would exempt climate investments from the debt limit, essentially arguing that preventing planetary catastrophe is more important than accounting rules.

On the left, Die Linke—The Left Party—opposes the debt brake entirely, viewing it as a neoliberal austerity mechanism that harms working people and prevents wealth redistribution. They argue that a country controlling its own currency can always service its debts and that deficit fears are overblown.

And on the right, the Alternative for Germany (AfD), the nationalist-populist party, supports the debt brake. This might seem surprising—populist parties in other countries often support spending—but the AfD's position reflects a particular German nationalist economics that combines anti-immigration sentiment with traditional fiscal conservatism.

War Changes Everything

The theoretical debates might have continued indefinitely if history hadn't intervened.

On February 24, 2022, Russia invaded Ukraine. Suddenly, Germany's decades of underinvestment in its military—justified partly by the debt brake—looked less like fiscal responsibility and more like negligence. The Bundeswehr, the German armed forces, was revealed to be shockingly unprepared: soldiers reportedly trained with broomsticks because they lacked rifles, helicopters couldn't fly, and equipment stocks would last days rather than weeks in actual combat.

Chancellor Olaf Scholz announced what he called a Zeitenwende—a turning point, a new era. Germany would establish a special fund of one hundred billion euros for military modernization. This required a constitutional amendment, adding a new paragraph to the Basic Law that explicitly exempted this defense fund from the debt brake.

The amendment passed the Bundestag 568 to 96, with overwhelming support from all mainstream parties. The taboo had been broken. The Basic Law could be changed. The debt brake was not actually immutable.

The 2025 Amendment

By early 2025, the fiscal straitjacket had loosened further. The traffic light coalition had collapsed, early elections had been called, and Germany faced a perfect storm of challenges: continued war in Ukraine, deteriorating relations with the United States under President Donald Trump's second term, an economy that hadn't grown meaningfully in five years, and infrastructure that was visibly failing.

Friedrich Merz, leading in polls to become the next chancellor, had campaigned on maintaining the debt brake. But reality, as it often does in politics, intervened. In negotiations to form a new government, Merz reached an agreement with outgoing Chancellor Scholz on a dramatic reform: defense spending above one percent of GDP would be exempted from the debt brake, and a new special fund of over five hundred billion euros would be created for infrastructure investment—roads, bridges, rail, broadband, all the projects that had been deferred for years.

The Greens extracted their price for support: one hundred billion euros from the infrastructure fund would go to climate and economic transformation, and climate neutrality would be enshrined in the constitution itself.

But there was a problem. The new Bundestag was scheduled to convene on March 25, 2025. After that date, the AfD and The Left—both opposed to the reform—would together control enough seats to block any constitutional amendment, which requires a two-thirds majority.

Merz had to pass the amendment before the new parliament even started work. It was constitutionally permissible but politically extraordinary—essentially asking the outgoing parliament, including many members who had just lost their seats, to make a momentous decision in their final days.

On March 18, 2025, the Bundestag voted 512 to 206 in favor. Three days later, the Bundesrat—the upper house representing the German states—approved it 53 to 16, with several states abstaining in what counted as opposition.

The debt brake had been reformed. Hundreds of billions of euros were now available for defense and infrastructure. Germany was free to invest in its future.

Or at least, that's one way to tell the story.

The Other Side of the Story

Critics of the reform saw something very different: a political establishment rushing through fundamental constitutional changes before voters who had just rejected that establishment could have their say. The FDP, whose pro-business voters had deserted the party in the election, joined the AfD and The Left in unanimous opposition. Court challenges were filed, though they failed to stop the vote.

From this perspective, the debt brake was never the problem. The problem was that politicians wanted to spend money without making hard choices about what to cut or which taxes to raise. The reform didn't address Germany's competitiveness issues, its bureaucratic sclerosis, or its energy policy failures. It just allowed more borrowing.

And the timing—ramming through an amendment before opponents could block it—raised troubling questions about democratic legitimacy. Even if the procedure was technically legal, was it right to make such consequential decisions in a lame-duck session?

What Does It All Mean?

The German debt brake saga illuminates something fundamental about self-governance: the difficulty of making binding long-term commitments in democracies.

Constitutions are meant to be hard to change. That's the point. They protect fundamental rights and structures from the passions of the moment. But fiscal rules exist in tension with democratic responsiveness. Voters in 2025 face different circumstances than voters in 2009. Why should decisions made sixteen years ago constrain what's possible today?

Yet if fiscal rules can be easily changed whenever they become inconvenient, they provide no discipline at all. The whole point of the debt brake was to prevent politicians from mortgaging the future for present popularity. If the rule disappears every time it actually constrains spending, it was never a rule—just a suggestion.

Germany's experience offers no easy answers. The debt brake probably did contribute to underinvestment that is now costly to remedy. It probably also contributed to fiscal credibility that allowed Germany to borrow cheaply when crisis hit. It probably was too rigid in some respects and appropriately constraining in others. Economics is rarely simple.

What's clear is that the debate will continue. The 2025 reform didn't abolish the debt brake—it created exceptions and workarounds. The underlying rule remains in the constitution. Future governments will still face tradeoffs between fiscal discipline and investment needs. Future courts will still interpret what the constitution allows.

And future generations will judge whether their predecessors made wise choices or simply kicked the can down the road—exactly what the debt brake was designed to prevent.

A Note on Economic Philosophy

One thing the German debate reveals is how much economic policy depends on underlying philosophical assumptions that are rarely examined explicitly.

If you believe that government debt is fundamentally similar to household debt—that borrowing today means paying back tomorrow with interest, and that excessive debt leads to ruin—then the debt brake makes obvious sense. Live within your means. Don't burden your children with your bills.

But if you believe that governments controlling their own currencies operate under fundamentally different rules than households—that they can always create money to service debts, that the real constraints are inflation and resource utilization rather than accounting balances—then the debt brake looks like a category error, applying household logic where it doesn't belong.

Most economists fall somewhere between these poles, acknowledging that while governments have more flexibility than households, debt still matters and fiscal irresponsibility has consequences. But where exactly to draw the line—how much debt is too much, which investments justify borrowing, how to balance present needs against future obligations—these questions don't have technical answers. They require value judgments about intergenerational equity, economic risk, and the proper role of government.

The debt brake forced Germany to make those judgments explicit and binding. The ongoing debate about its reform is really a debate about what kind of society Germany wants to be and what obligations current citizens owe to those who come after.

That's not a debate that spreadsheets can resolve. It's a question of political economy in the deepest sense—the way a polity organizes its economic life. And Germany, whether it knows it or not, has been conducting a sixteen-year experiment in constitutional economics whose lessons the rest of the world is watching closely.