Germany Should Consider Easing Debt Brake, says IMF

The International Monetary Fund said Tuesday that the German government should adjust its controversial fiscal spending limit in an effort to free up more public investment, as the country faces growing spending pressures.

Germany, Europe's largest economy, has a constitutionally enshrined fiscal rule, known as its debt brake, that restricts government spending to a deficit of 0.35% of gross domestic product in normal times.

The IMF said that while fiscal rules help to ensure that debt remains at sustainable levels, authorities should consider moderately easing the debt brake to accommodate rising spending needs.

Germany faces extra spending pressures, notably due to its ageing population, but also will need to confront challenges associated with increased defense spending, alongside upgrades to infrastructure in transport, energy and communications, the Washington DC-based organization said.

"Our recommendation is that this easing could be by one percentage point of GDP, which would keep the debt-to-GDP ratio on a downward path," Kevin Fletcher, the head of the IMF's staff visit to Germany, said in a press conference in Berlin.

Such an easing would allow more room for much-needed public investment and other key priorities, the IMF said.

The debt brake has caused headaches for Germany's current coalition government. The country's top court last year declared government spending plans unconstitutional as it broke fiscal rules, delaying the 2024 budget and leading to calls for a reform of the law.

Nevertheless, the IMF said Germany's economic growth is expected to accelerate in 2025, after a projected 0.2% rise in GDP in 2024, led by rising real wages that will drive higher household spending.

Private investment is also set to recover in 2025 on the back of improved demand and anticipated monetary-policy easing from the European Central Bank, the IMF added.

May 29, 2024