Germany Must Ensure Return to Sound Finances, Bundesbank Says

Germany must start dialing back its borrowing limits from 2029 to ensure solid public finances over the long term, according to the Bundesbank.

The central bank, which advises the government on economic policy, proposed a three-stage plan to lower debt, and repeated a call to better focus hundreds of billions of euros of spending on defense and infrastructure.

“The aim is to reliably safeguard sound public finances and public investment, to comply with European Union rules and to enable a relatively stable fiscal policy,” the report said Tuesday in a report.

German lawmakers in March introduced an exemption from the so-called debt brake — a constitutional restraint on borrowing — to free up cash for the military and to rebuild roads and bridges. The move marked an abrupt departure from the fiscal restraint that had shaped German policy since the 2008 financial crisis and stood in contrast to what Chancellor Friedrich Merz had proposed during his election campaign.

While such steps were “understandable,” “unlimited borrowing possibilities” on the army aren’t compatible with sustainable public finances or EU regulations, the Bundesbank said.

Its proposal foresees current credit limits remaining unchanged until 2029. A second phase, until 2035, would see the structural deficit ratio gradually fall from about 4% in 2029 toward 1% — also by increasingly financing defense spending without new loans.

The final phase, starting in 2036, is closely based on a Bundesbank reform proposal from March, with additional borrowing capacity for the federal and state governments depending on debt levels, to firmly anchor it at the EU benchmark of 60%.