Dissidence in the coalition: the CDU's red line on the debt brake

The German Christian Democratic Union (CDU) has reached a decision on how it would support reforms to the debt brake, a fiscal rule designed to limit government borrowing. The resolution, obtained by Frankfurter Allgemeine Zeitung (FAZ), states that the CDU would only agree to changes that make taking on new debt significantly more difficult. This stance contrasts sharply with the Social Democrats (SPD), who advocate for permanently easing the rules to allow state investments to be financed through debt. The issue could become a major point of contention within the coalition after the summer break, possibly even earlier. The CDU’s position, outlined in a paper titled “Schuldenbremse wirksam schärfen, Staatsverschuldung begrenzen statt ausweiten,” emphasizes that any change to the debt brake must ensure future debt limits are effective, maintain the sustainability of public finances, uphold European fiscal rules, and reduce the national debt-to-GDP ratio. The document calls for clarifying exceptions to the debt brake, particularly regarding defense spending. Currently, expenditures aimed at strengthening Germany’s defense capabilities that exceed one percent of GDP can be financed through debt. The CDU proposes gradually increasing this threshold to 2030, aiming to finance NATO obligations using regular tax revenues rather than debt. In addition to tightening the debt brake, the CDU’s financial policy group is pushing for stricter deficit limits for both federal and state governments. They also want more restrictive lending conditions for social security institutions such as sickness funds and tighter controls over declaring a crisis situation. Franziska Hoppermann, chairwoman of the CDU's financial policy group, told FAZ that the party adheres to a clear fiscal philosophy: expenses should align with revenue. She criticized the constant search for new revenue sources, arguing that rising interest costs will strain budgets in coming years and that a downgrade of Germany’s credit rating by agencies could worsen the problem. The debate has intensified because Chancellor Friedrich Merz, also a member of the CDU, made it clear during his summer press conference that he does not expect any further reform of the debt brake during this legislative period. He described the hurdles for changing the debt brake as extremely high, both in terms of content and procedural requirements. Merz expressed little confidence that a reform will occur, citing the need for a two-thirds majority in the Bundestag. Unlike last year’s relaxation of the debt brake, which required support from the Greens, a reform now would also require backing from the Left Party or the far-right Alternative for Germany (AfD). The CDU has ruled out cooperation with both parties. An expert commission convened to examine potential reforms has yet to reach consensus on a unified proposal. Unlike previous commissions focused on healthcare and pension insurance reforms, members of the debt brake commission have failed to agree on a common approach. One proposed solution mirrors the CDU’s vision, suggesting a gradual increase in the threshold for defense-related debt financing. This plan aims to align with NATO commitments while reducing reliance on debt. The commission plans to present its findings to Finance Minister Lars Klingbeil of the SPD in the coming days. The lack of agreement underscores the deepening divide between the coalition partners over how to balance fiscal responsibility with investment needs.