Germany, long regarded as the economic locomotive of Europe, unveiled a 2025 budget plan in July 2024 that raised eyebrows across financial markets (to say the least). With a mix of ambitious spending, fiscal rule-bending, and stubborn adherence to the controversial “debt brake,” the new budget reflected a government grappling with competing priorities—security, economic growth, and social cohesion—in an increasingly turbulent global environment. But an economic powder keg lay beneath the surface of this carefully crafted compromise.
The 2025 draft budget, approved by the German cabinet in July 2024, allocated €480.6 billion in spending, slightly less than the €488 billion of 2024, while touting a record €78 billion in investments. On the surface, it promised to address pressing needs: €57 billion for infrastructure like railways and roads, €23 billion in tax relief over two years, and continued adherence to NATO’s 2% GDP defense spending target. Accompanying the budget was a “growth initiative” featuring 49 measures aimed at boosting competitiveness, reducing bureaucracy, and incentivizing work—all while staying within the constitutional debt brake, which caps the federal deficit at 0.35% of GDP.
But the cracks appeared quickly. The budget hinged on €43.8 billion in new loans, a figure that danced dangerously close to the debt brake’s limits. To bridge a €17 billion gap between projected spending and revenue, the government explored creative accounting tricks (like converting Deutsche Bahn grants into loans and tapping state bank KfW funds)—moves that have raised legal and economic red flags. Meanwhile, economic forecasts painted a grim picture: Germany’s economy shrank by 0.2% in 2024, following a 0.3% contraction in 2023, with growth officially (and optimistically) projected at a measly 0.3% in 2025.
Germany’s sacred debt brake, a fiscal rule enshrined in its constitution, has long been a symbol of its prudent economic management. Yet, it’s increasingly seen as a relic ill-suited to today’s challenges—high energy costs, geopolitical uncertainty, and crumbling infrastructure. The 2025 budget stuck to this limit, but only through fiscal gymnastics that critics say undermine its credibility.
The “record” €57 billion investment announced was a drop in the bucket. The German Economic Institute estimated a €600 billion public investment backlog over the next decade due to decrepit railways, underfunded schools, and a lagging green transition. The budget’s modest increase barely offsets inflation, let alone tackles this structural deficit.
The parties poised to form the next German government have just agreed to a €500 billion infrastructure fund and a radical overhaul of the country’s borrowing rules. Their plan aims to revamp the military, jolt the stagnating economy, and reposition Germany as a geopolitical heavyweight amid a fracturing transatlantic alliance. It’s a daring move, no doubt, but one that teeters on the edge of madness.
For decades, Germany’s “debt brake” (the constitutional cap limiting federal deficits to 0.35% of GDP) has been the bedrock of its fiscal identity, a symbol of prudence born from the 2008 financial crisis.
The proposal is twofold: create a €500 billion fund for infrastructure and amend the constitution to exempt defense spending above 1% of GDP from the debt brake. This isn’t just tinkering; it’s a full-on assault on Germany’s fiscal orthodoxy. Markets reacted instantly: the euro surged to a four-month high, 30-year German bond yields spiked in their biggest one-day jump since the late 1990s, and the DAX soared 3.4% to near-record levels. Investors smell opportunity, but they’re also sniffing risk.
Context is everything. Trump’s re-election and his threats to pull back from NATO have raised pressure on Europe significantly. Germany, long criticized for a neglected Bundeswehr, sees this as a do-or-die moment to step up. Merz himself framed it bluntly: “Whatever it takes must now apply to our defense.” The €500 billion fund also targets an economy in the doldrums, already in recession for two years in a row, with a car industry on its knees and an investment backlog estimated at €600 billion. Clearly, Germany is trying to buy its way out of economic implosion and geopolitical irrelevance.
If this plan works, it would likely end up being considered a bold move. The infrastructure fund promises to fix crumbling railways, digitize schools, and maybe even drag the country into the 21st century. However, this plan is a big gamble, and the stakes are sky-high. Loosening the debt brake requires a two-thirds parliamentary majority—a tall order with the far-right AfD and far-left holding sway post-election. German MSM are already crying “voter deception,” accusing Merz of a 180-degree flip from his campaign promises of fiscal restraint, and public support is shaky too. If the coalition stumbles even before forming a government, they could collapse before taking office, sending Germany into even greater chaos.
Stock Markets might cheer now, in stark contrast with the reaction of government bonds, but undermining fiscal stability could send bond yields soaring further, hiking borrowing costs and squeezing households already battered by high energy prices and inflation that is far beyond the ridiculous misstated low levels of public statistical agencies.
Germany’s fiscal bazooka is a high-wire act to ditch the debt brake’s shackles and bet big on defense and growth. A stronger military and a revitalized economy could cement Germany’s role as Europe’s backbone, especially as Trump’s America turns inward, but the risks are glaring: political gridlock, fiscal overreach, and a polarized society could turn this into a costly misfire.
JustDario on X | JustDario on Instagram | JustDario on YouTube