In Germany, “debt hawks” are slowly but surely waking up to the reality of their manufacturing industry being brought to its knees. In Angela Merkel’s recent book, she pleads for a softer stance on the debt brake, and the political landscape in Germany seems to be softening on the “Schwarze Null” in general, with also the Buba member Nagel now advocating for a softer stance.

The future government would need a two-thirds majority in the Bundestag and Bundesrat to change the debt brake. With the FDP (4,5%) and the Left (3,5%) looking unlikely to meet the 5% threshold in some polls, this could make changes to the law easier. But what would a potential debt issuance look like, if the debt brake were to be removed? 

Well below, we have calculated what a potential debt issuance could look like in Germany. Firstly, we determine how many units of debt are needed to create one unit of growth. For Germany, this figure is about 0.6, which is unsurprisingly below the sensitivities of both the EU27 and Italy. We then assume that Germany’s debt issuance will mirror the amounts issued during the last three times the country “opened its pockets.” This suggests an issuance of debt worth 400 billion EUR. If the debt increases by 400 billion EUR and yields 1.67 units of GDP per unit of debt, this would lead to a rise in nominal GDP of 670 billion EUR, bringing it to around 5 trillion EUR with a lead/lag time of around 5 qtr., meaning the debt issuance will feed fully through to GDP after 5 qtr. We assume here that the marginal effects of debt stay constant.

In terms of investment possibilities for the government to kick start the economy, there are some low-hanging fruits for Germany to target with this debt issuance. Key på indicators in the construction sector have fallen to levels not seen since the Global Financial Crisis, making it an obvious area to prioritize. For the manufacturing sector, allocating funds to the postwar reconstruction of Ukraine seems like a straightforward and impactful way to spur revival. CDU leader Merz, who will likely lead the new government, highlighted that the current situation is not alarming enough yet, so we would need to see further escalations or an increase in internal pressures within the CDU against Merz’s position on the debt brake. On the other hand, he also highlighted the significant amount of investments needed for the defense sector, which is why this would likely be one of the main sectors to benefit from a reform, potentially boosting companies such as Rheinmetall.

Last week, ThyssenKrupp announced plans to cut or relocate one-third of its workforce by 2030. Prompt government action could encourage the company to reconsider and potentially save German jobs. For the German defense sector, placing additional orders seems like an obvious choice. However, with order books already filled beyond 2027, additional spending in this area is unlikely to have much impact on employment unless production capacity is expanded.

Chart 1.a: It takes 0.6 units of debt to create 1 unit of GDP