A new approach to the Debt Rule: Stability and Growth in the EU Fiscal Framework

Debt as a prerequisite for state action 

While debt associated with the goal of investment is generally viewed positively in business terms, public debt is usually under pressure to justify itself. But public debt also has its justification. ‘The government must be able to borrow in order to perform important state functions.’ In this context, Prof. Steinbach cites three central functions of the state according to Musgrave: the allocation function, the stabilisation function and the distribution function. A ‘good’ debt rule creates the possibility of distributing financial resources not only in the short or medium term, but also in the long term, in such a way that the community can be structured fairly and in a future-oriented manner across generations and within a single generation – Investment is also necessary in national economy.

Three phases of the German debt rule: from the golden rule to the structural flexibility

In March of this year, the amendment to the German financial constitution led to fundamentally new directions for fiscal policy.

The German debt rule (Art. 109 GG) states that the budgets of the federal and state governments must be balanced without income from loans. In addition, budgetary discipline must be observed in accordance with European obligations in order to take account of the requirements of macroeconomic balance.

In his presentation, Professor Steinbach explained how the German debt rule has developed in three key phases to date. The current third phase (from 2025) marks a new direction: Three elements were introduced with the amendment to the fiscal constitution: a special fund of €500 billion for infrastructure and climate neutrality promotes the allocation function, a sectoral exemption for defence and security creates flexibility and thus strengthens the stabilisation function, while the structural new borrowing margin of 0.35 per cent of GDP for the federal states has a favourable effect on the distribution function. These measures aim to optimally support all three Musgrave functions without jeopardising the stability of public finances. However, their actual implementation depends on assumptions based essentially on a war or peace scenario, which, for example, would have implications for a gradual reduction of the sectoral exemption for defence by 2030.

EU fiscal reforms and country-specific adjustments: from uniform rules to national leeway

The reform of the Stability and Growth Pact (SGP) in 2024 shifted EU fiscal rules from a ‘one-size-fits-all’ approach to country-specific requirements. Until 2024, uniform rules applied, which strongly influenced Germany in the second phase of the debt rule. From 2024 onwards, the rules will be adapted to the specific economic conditions of the member states, which will allow Germany to make use of more leeway for investment.
Prof. Steinbach emphasises that the German debt rule has been reviewed in the context of this reform and adapted to the new EU criteria. The third phase of the German rule, with its special fund and sectoral exemption, allows for a stronger focus on long-term investment, while the EU rules ensure the sustainability of debt.

The task for the expert commission: balancing stability and growth

An expert commission mandated by the German government to modernise the debt rule is developing proposals in various working groups for amendments to the constitution that strike a balance between the stability of public finances and growth. The findings of the expert commission will be decisive for the future shape of German fiscal policy, both nationally and in the European context.

The recommendations, which will form the basis for further adjustments to the debt rule, are expected to be presented by the end of 2026. The expert commission will also take into account the seven-year scenarios of the EU fiscal rules to ensure compatibility. This is crucial in order to combine the new EU requirements with national financial targets while strengthening the state's ability to act on long-term investments.