What were the economic reform proposals that Germany recently approved? 

A few days ago, the German parliament, or the Bundestag, passed a historic law that allowed the country to remove the limits that had earlier constrained government borrowings. For the move to become law, the constitution would need to be changed, which would require a two-thirds majority both in parliament as well as in the Bundesrat, which represents the country’s States. The coalition pushing these reforms won the necessary votes in both houses. 

What were the changes? 

Earlier, the German government could not allow fiscal deficit to exceed 0.35% of the country’s GDP. Now, a $548-billion fund for defence and climate infrastructure as well as for other expenses above a threshold will be exempt from what was referred to as the ‘debt brake’ law. Germany used to lead other European countries in their exercise in being fiscally frugal. That is now set to change. 

Why did it need these reforms? 

Germany’s economy has been stagnating for a while now. In a blog post about a year ago, the IMF said Germany has had to deal with three major problems – ageing, underinvestment and too much red tape. 

Both public and private investment have declined, spurred by an ageing population, with the younger generation in family-run businesses looking at export markets rather than to the domestic economy, says Prof Clemens Fuest of the IFO Institute of Economic Research in article for EconPol Europe, a policy forum. 

He also points out that declining investments in housing are a cause for concern, driven by high interest rates and regulations that tend to spur construction costs. A shortage of land, long approval processes, and rental policies are making investors hesitate. 

The slide in public investments that started in the 1990s puts Germany at the bottom of the heap compared to advanced economies of the West. As a percentage of GDP, Germany is above only Spain in this comparison by IMF. 

During a recession, governments tend to spend more than they earn (via taxes, etc). Such spending helps infuse money into the economy, thereby spurring demand. This also has a ripple effect as private sector firms tend to invest as they see an expanding market for their goods. Modernising infrastructure is also expected to give a boost to the economy. 

Raising labour productivity, through greater public investment is yet another objective. Migrants have helped add to Germany’s working population. But with nationalistic fervour taking over, such migration could slow or end, and with more of such population retiring in the coming years, the growth rate of Germany’s labour force is set to drop by more than in any other G7 country, according to the IMF. 

Did the proposals have all-round political support? 

The conservative Christian Democratic Union and its sister party the Christian Social Union, allied with the Greens (which has environmental and pacifist leanings) to push the bill through both the houses. 

What is the forecast for economic growth? 

The European Commission forecasts Germany’s GDP growth of just 0.7 per cent in 2025 – this is the slowest pace among EU nations. The German economy contracted 0.1 per cent in 2024. Things look relatively brighter for 2026 with a growth estimate of 1.3 per cent. 

The Atlantic Council points out that since 2017, the German economy has grown by a mere 1.6 per cent, far below the EU average of 9.5 per cent. 

Following approvals for the proposals, investors’ confidence has risen. An expectations index by the IFO Institute shows that business optimism has risen for the first time since last June. 

Bloomberg quotes economist Martin Ademmer of its research wing as saying: “Germany’s economy is slowly regaining its footing — that’s the signal coming from the March Ifo business climate index and PMI data, both of which show sentiment is improving, especially in the struggling manufacturing sector.” 

Deutsche Bank Research points that it would take time for the reforms to help the economy along. That is why it estimates growth to only slowly pick up and gradually go up to 2 per cent in 2027. But even deficit spending can only do so much for economic growth. DB Research predicts that the political coalition that is expected to form the government in Germany may not be able to push through a lot more reforms. Hence, it estimates only 1 per cent growth for 2029.

Published on March 28, 2025