Germany’s Debt Brake is Really a Red Herring

A Letter by the IEP@BU Director Daniel Gros Published in the Financial Times

by Daniel Gros

Shahin Vallée’s op-ed on Germany’s debt brake (January 30) is yet another example of the popular narrative that the constitutional provision in Germany to limit the deficit, in normal times, to 0.35 percent of GDP is the main obstacle to prosperity.

A first charge leveled against the debt brake is that it impeded spending on infrastructure in the past (making it responsible for the sorry state of German infrastructure today).

A second one is that today it would not allow the government to engage in deficit spending on military and industrial policy.

As Vallée rightly noted, public sector infrastructure spending was too low even when the debt brake was not biting.

The main obstacle for higher spending was in reality insufficient planning and administrative capacity at the regional level (where most spending takes place) combined with pervasive popular resistance to any new road or rail project.

Modifying the debt brake to allow for more government investment would also not address the second charge since even the most creative accounting cannot transform spending on the military, or on industrial subsidies, into investment.

As for private sector investment, the German business sector is investing as much as the EU average (around 21 percent of GDP).

The economy is weak not because of a lack of investment, but because of the sectors it goes into. German industry has specialised in mid-tech sectors, like automotive, that are now under increasing competitive pressure from China.

Massive investment in high-tech sectors that could drive a recovery of the German economy is certainly desirable, but it can come only from the private sector.

Denmark, Europe’s champion in high-tech has been running budget surpluses for years. Loosening the debt brake to allow for more deficit spending on the industrial subsidies will not bring back prosperity to Germany.

This letter was published in the Financial Times on January 31, 2025.

Daniel Gros

Daniel Gros is Director of the Institute for European Policymaking @ Bocconi University.

Between 2020 and 2022 he was Distinguished Fellow and Member of the Board of the Centre for European Policy Studies (CEPS). Before that, was the director of CEPS from 2000. In 2020, he held a Fulbright fellowship and was a visiting professor at the University of California, Berkeley. In March-June, 2022 he was visiting Research Fellow at the Robert Schuman Centre of the European University Institute, Florence.

Gros is also currently an adviser to the European Parliament. Previously he worked at the International Monetary Fund and collaborated with the European Commission as economic adviser to the Delors Committee, which developed plans for the euro. He has been a member of high-level advisory bodies to the French and Belgian governments and advised numerous central banks and governments, including Greece, the United Kingdom, and the United States at the highest political level.

He has published extensively on international economic affairs, including on monetary and fiscal policy, exchange rates, banking, and climate change. He is the author of several books and editor of Economie Internationale and International Finance. He has taught at several leading European universities and contributes a globally syndicated column on European economic issues to Project Syndicate. He holds a PhD in economics from the University of Chicago.

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Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

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• Catherine De Vries, Dean for International Affairs and Professor of Political Science at Bocconi University

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School