In its monthly report released on Monday, Germany's central bank supported the idea of increasing the cap on the government's deficit. This proposal comes at a time when public debt is low, and there is a recognized need for investment in infrastructure and defense. The current limitation on public deficits to 0.35% of gross domestic product, known as the "debt brake", was a central theme in Germany's recent political campaign. Friedrich Merz, the probable next chancellor, has expressed his stance on this crucial economic issue.
Traditionally known for its conservative economic views, the Bundesbank acknowledged the possibility of adjusting the debt brake "to changing conditions." The bank emphasized the importance of fiscal rules like the debt brake in maintaining sound state finances. It mentioned that modifying the borrowing limit under the debt brake could be justifiable when the public debt ratio is low.
The Frankfurt-based institution, though not involved in fiscal policy decisions, holds considerable influence in Germany. It stressed that any potential increase in deficit ceilings should be obligatory and in line with sound fiscal practices. Furthermore, it highlighted the necessity of reassessing priorities and optimizing financial resources to better address fiscal challenges.
The Bundesbank underscored the urgency for action in public infrastructure and defense spending, considering the already high tax burden and spending ratios. Germany's economy has experienced two consecutive years of contraction and requires significant enhancements to compete globally, notably against economic powerhouses like China and the United States.
While the Bundesbank anticipates modest growth in the German economy in the upcoming months, it cautioned that the country is still grappling with stagnation, particularly due to the repercussions of potential U.S. tariffs dampening global economic activity.