Debt brake reform hinges on Germany’s small parties

“The CDU is focused on defence and tax cuts, the SPD wants more industrial policy, and the Greens want climate spending. Negotiations about the allocation of any additional funds borrowed by Germany will proceed in parallel with, not separately from, discussions about the mechanism of debt brake reform,” says Sander Tordoir, chief economist at the Centre for European Reform, a think-tank.

If Germany is unable to use its fiscal space to stimulate its economy, an additional risk is that this would create a Eurozone-wide imbalance, according to Tordoir. “Debt brake reform in Germany will allow highly indebted Eurozone countries to do fiscal consolidation with fewer repercussions on demand,” he says. “By contrast, if Germany continues to restrict its fiscal space, it will shift the burden on highly indebted Eurozone countries to continue borrowing more in order to prop up the bloc’s economy, perpetuating a situation that the ECB already finds hard to handle.”