Stay informed with free updates
Simply log in to German economy myFT summary — delivered straight to your inbox.
The head of Germany’s Bundesbank has called on Berlin to ease strict spending rules, warning that Europe’s biggest economy faces a “complicated” and “weak” outlook.
Germans are due to go to the polls in February, and the post-pandemic stagnation of Europe’s largest economy has contributed to widespread voter dissatisfaction with Chancellor Olaf Scholz’s ruling coalition.
Bundesbank President Joachim Nagel told the Financial Times that the next government needs to reform its so-called debt brake, which bars Berlin from borrowing more than 0.35 percent of GDP in any fiscal year, to address the longer-term economic risks facing Germany.
More fiscal space to address structural threats — such as increasing defense spending and modernizing the country’s infrastructure — would mark a “very smart approach,” Nagel said.
The Bundesbank president’s remarks are the most open yet about how he believes the incoming chancellor should deal with Germany’s limited fiscal maneuvering.
The current outlook, Nagel said, is even more “complicated” than at the beginning of the 21st century. While unemployment was much worse then, “there was no geopolitical fragmentation and world trade grew strongly.”
German economy in fact, it has not seen real growth since the second half of 2021, with the dominant manufacturing sector under pressure from high energy costs and weakening competitiveness.
Donald Trump’s return to the White House could exacerbate those challenges, as the president-elect would threaten blanket tariffs of up to 20 percent on all US imports.
The Bundesbank will not formally update its growth forecast until later this month, but Nagel said 2025 was likely to be “another year of weak growth” for the German economy, with the central bank’s estimate likely to be around 0.4 percent.
Growth is likely to be even weaker if Trump implements blanket tariffs on the scale he has promised, the central banker said.
“If you put large tariff increases on top of current forecasts, the economy could generally stagnate for even longer,” he said, adding that “even the labor market could show more noticeable weakness.”
The seasonally adjusted unemployment rate in Germany, as defined by the Federal Employment Agency, remains relatively low at 6.1 percent. However, this level partly reflects the creation of an abundance of low-paid jobs in the service sector at the expense of well-paid manufacturing work.
Nagel said he was still confident the country could overcome any crisis, saying: “The experience so far shows that Germany will change when Germany feels pain.”
He singled out discussions on reforming the constitutional debt brake as an example of how Germany could cope.
“We can think about making a difference between consumption spending and investment to get more room for structural investment,” he said, noting that Germany’s debt-to-GDP ratio has fallen significantly and is approaching the 60 percent level set by EU rules. stability and growth pact.
The inability to balance spending needs with the limited financial room for maneuver created by the debt brake was the main reason for the collapse of Scholz’s ill-fated tripartite coalition between the Social Democrats, Greens and Free Democrats last month.
Ahead of early elections, likely to be held in February, the revision of the strict debt limit has become a central issue. Opposition leader and the most likely candidate for chancellor, Christian Democratic Union party chief Friedrich Merz, has signaled he may be open to limited reforms to the debt brake.
First the Bundesbank floating ideas for the reform of the debt brake in 2022.
Nagel said in March that Germany could run “slightly” larger deficits “in certain periods of time” without putting stability in question.
Nagel acknowledged that the debt brake, agreed in 2009, was a “very useful tool” after public debt rose dramatically in the wake of the global financial crisis. During the euro crisis, the break also sent a message “that governments need to get their debt and deficit conditions under control.”
The head of the Bundesbank, who has voting rights on the European Central Bank’s governing council, declined to give any indication of his views on the next rate decision, scheduled for December 12.
However, he said the ECB’s 2 percent inflation target was “in sight” and should be reached “by the middle of next year at the latest”.
Inflation in the Eurozone was 2.3 percent in November. The ECB’s latest forecasts suggest that rate-setters will reach their target during 2025.
He stressed that he would not “overemphasize” the risk of the ECB exceeding its 2 percent target because core inflation – a measure seen as a better indicator of the persistence of price pressures – is “still very volatile”.
Data visualization by Steven Bernard in London
