Germany's Debt Dilemma: Central Bank Pushes for Constitutional Reform

Germany's central bank has proposed reforming the constitutionally enshrined 'debt brake' to allow for more government borrowing, aiming to provide up to 220 billion euros for investment and defense. The proposal seeks to balance economic growth with fiscal responsibility, amid criticism and complex political negotiation.

Germany's central bank has made a bold proposal to reform the country's stringent borrowing cap, aiming to grant the government an additional 220 billion euros by the end of the decade for crucial defense and investment expenditures. This move has sparked debates among political parties and investors.

Critics argue that the existing debt brake, which restricts budget deficits to 0.35% of GDP, has been a barrier to economic growth, particularly as the German economy has contracted over the past two years. Chancellor-in-waiting Friedrich Merz is cautious, citing the complexities involved in overhauling fiscal rules.

The Bundesbank suggests that if the debt ratio is kept below 60% of GDP, the government could borrow up to 1.4% of GDP, with the majority allocated to fixed asset investments. The proposal emphasizes the urgency of increased defense spending, especially in light of the U.S. pausing military aid to Ukraine.

(With inputs from agencies.)