Merz Opens Door to Reform Germany’s Strict Borrowing Limits

(Bloomberg) - Conservative chancellor candidate Friedrich Merz said he's open to reform Germany's strict borrowing limits as long as additional debt-financed spending is used for investment.

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The remarks represent a departure from the traditional stance of the Christian Democrat-led bloc, which has a clear lead in the polls. In the past, Germany's conservatives made adherence to the so-called debt brake a hallmark of their agenda.

"Of course it can be reformed," Merz said Wednesday at a Sueddeutsche Zeitung business conference. "The question is why and for what purpose."

Merz added that any changes to the rules would need to be attached to specific conditions. The move could smooth possible coalition negotiations with Chancellor Olaf Scholz's Social Democrats and the Greens after the snap election slated for Feb. 23.

"If the result is that we spend even more money on consumption and social policy, then the answer is no," he said. "If the result is that it is important for investment, it is important for progress, it is important for the livelihoods of our children, then the answer may be different."

Scholz has argued that the current form of Germany's constitutional debt rules restricts the government's ability to respond to the growing impacts of global warning, Russia's attack on Ukraine and aging infrastructure.

The debt brake limits structural budget deficits to no more than 0.35% of gross domestic product, although exceptions allow for expanded borrowing during national emergencies or recessions.

The rules were established in 2009 after costly bank bailouts following the global financial crisis. Germany has since been buffeted by a series of external and internal crises, which has hampered growth and triggered widespread frustration.

While the country amended the constitution to create a one-off special €100 billion fund to upgrade its military after Russia's invasion of Ukraine, meeting NATO criteria for spending 2% of GDP on defense is all but out of reach under the debt brake once that money runs out.

"Nobody would write it again the way it exists today, with all the knowledge we now have," Scholz told a conference last month, advocating for a modest adjustment to the rules. "Let's find the necessary two-thirds majorities in the Bundestag and Bundesrat to do this."

Scholz's coalition with the Free Democrats and the Greens collapsed last week over an open dispute about suspending the debt rules to close a budget gap and fund support for Ukraine.

Merz Opens Door to Reform Germany’s Strict Borrowing Limits

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