Debt, Discipline and Market Trust – Debate on Germany’s Fiscal Future

The Frankfurt School Centre for Central Banking, together with Bankenverband Mitte, hosted a high-profile panel discussion on The Reform of the German Debt Brake and Sustainable Public Finances on 17 September 2025. Against the backdrop of a constitutional amendment passed in March 2025, which enables large-scale public spending in defence, infrastructure, and climate protection, the event brought together policymakers, academics, and financial practitioners to examine the far-reaching implications for Germany’s economy and capital markets.

Professor Jens Weidmann, former President of the Deutsche Bundesbank and Professor of Practice in Central Banking at Frankfurt School, opened the event by recalling the enduring importance of fiscal discipline for economic stability. Quoting former Bank of England Governor Mervyn King, Weidmann underlined that sustainable public finances not only support growth but also safeguard the independence of central banks in fighting inflation. He stressed that while the debt brake had played a decisive role in reducing Germany’s debt ratio to below the Maastricht threshold in 2019, successive crises and special funds have since put the rule under increasing strain.

The panel, moderated by Sarah Schmidtke, Managing Director of Bankenverband Mitte, featured:

• Professor Ralph Alexander Lorz, Hessian Finance Minister
• Professor Volker Wieland, IMFS Endowed Chair of Monetary Economics
• Dr Tammo Diemer, Member of the Executive Board of the German Finance Agency
• and Dr Frank Engels, Member of the Executive Board of Union Investment.

Diverging perspectives on the reform

Minister Lorz highlighted the political rationale behind the reform: the urgent need to rebuild Germany’s defence capabilities and modernise critical infrastructure. In his view, these priorities could not realistically be financed within the previous debt limits without jeopardising other essential state functions.

Professor Wieland, by contrast, voiced concern that the new exemptions might undermine long-term fiscal sustainability. Drawing on findings of the Scientific Advisory Board to the Finance Ministry, he argued that the reform risks pushing the debt ratio onto an upward trajectory, especially if large-scale infrastructure funds are not efficiently deployed. He cautioned that, without structural reforms and better spending discipline, the amended framework may prove too permissive.

Capital markets and investor confidence

Dr Diemer provided insights from the German Finance Agency’s perspective. Demand for German government bonds, he noted, remains strong, underlining Germany’s status as the euro area’s safe asset. However, he emphasised that international investors expect transparency and prudent use of additional fiscal space. “There will always be demand for Bunds,” he remarked, “but investors are watching closely how this new fiscal freedom is managed”.

Dr Engels confirmed that foreign investors largely welcomed the reform, seeing it as overdue investment in defence and infrastructure. Domestic investors, however, reacted with more caution, reflecting Germany’s longstanding commitment to fiscal discipline. Engels warned that unless funds are spent effectively, particularly at the municipal level, market confidence could erode over time.

European and global context

The panel also examined Germany’s role within Europe. With France facing political and fiscal turbulence and Italy’s debt remaining high, many foreign investors view Germany as the anchor of stability in the euro area. Yet, as Frank Engels stressed, even safe havens can develop “cracks” if reforms stall or fiscal rules are diluted. Several speakers pointed out that Germany’s credibility in maintaining fiscal discipline has implications far beyond its own borders.

Reform priorities and outlook

In closing reflections, the panelists converged on the view that sound public finances and growth-enhancing reforms are not mutually exclusive but must go hand in hand. Calls were made for reducing bureaucracy and pursuing pension and tax reforms to ensure fiscal sustainability. As Minister Lorz emphasised, the amended debt brake provides time—but not unlimited leeway—to implement such changes.

Following the debate, participants continued their exchange during a networking reception, underlining the importance of open dialogue on one of Germany’s most pressing economic policy issues.