On Tuesday, March 18, the German Parliament approved amendments to the Constitution providing for the easing of the debt brake. Let’s look at what this decision indicates and what risks or opportunities it poses for Ukraine.
In the long term, the German economy may have another problem
Germany’s decision to reform the debt brake (Schuldenbremse), which has been in effect since 2009 and limited public debt to 0.35% of GDP, has become an indicator of how radically the country’s approach to defense spending is changing. The changes stipulate that spending on defense, civil protection, intelligence services and cybersecurity will be subject to the debt brake only within 1% of GDP, or approximately 44 billion euros of GDP in 2024. Anything above this amount can be paid for with loans. According to experts at the KSE Institute, this step demonstrates the German government’s awareness of the weakening of the transatlantic partnership with the United States.
The reform of Germany’s debt policy will have serious consequences for European markets. Since German bonds are a benchmark for other European sovereign securities, borrowing costs may also rise for other countries. At the same time, increased economic uncertainty in the United States, in particular due to the Trump factor, may increase demand for European bonds. Economic analysts assure that additional hundreds of billions of spending will create some inflationary pressure, but it will be moderate, since the ECB has already curbed price growth after the COVID-19 pandemic.
At the same time, it is obvious that a classic increase in the budget deficit can accelerate inflation. But in the case of Germany, the effect on prices is unlikely to be significant in the short term. In the long term, a high deficit may affect the country’s debt indicators, and this may add another problem to the German economy.
Ukraine is celebrating prematurely: German manufacturers may prioritize orders from Germany over arms deliveries to Kyiv
For the moment, borrowing significant funds for defense spending and financing the €500 billion infrastructure fund is unlikely to create serious risks for the German economy. As analysts note, the ratio of public debt to GDP in Germany is 62%, which is almost half the American figure (123%). This difference allows the German government to increase spending without serious risks to economic stability.
The optimism of Europeans on this matter has at least some practical basis, since Europe can benefit from the formula: investment in the German defense industry + growth in industrial production + reduction in security risks = currency stability. The joy of the Ukrainian authorities from the changes taking place is a little premature. Today, Kyiv is happy about the news of the unblocking of military aid in the amount of 4 billion euros, as well as about the definition of defense spending that does not fall under the restrictions of the debt brakes (more than 1% of GDP) — they include aid to Ukraine. However, there is a risk that the increased costs of rearming the Bundeswehr could lead to German manufacturers giving priority to orders from Germany rather than to arms supplies to Ukraine. And such a decision is not only logical, but also fully corresponds to the spirit of the times and the expectations of the Europeans themselves.
