By Palma Polyak
Palma Polyak is Senior researcher, Max Planck Institute for the Study of Societies.
On November 6, 2024, Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, dramatically ending Germany’s “traffic light” coalition. This collapse wasn’t just a matter of personal differences—it resulted from a fiscal orthodoxy that has shackled Germany’s economy for over a decade. Dogged adherence to balanced budgets has systematically thwarted critical investments in infrastructure, climate action, and digitalization, while external demand masked the model’s flaws. With export markets shrinking in the United States and China, the enablers of this approach have fallen, exposing deep cracks in the foundations of Germany’s economic model. Yet the political obstacles to dismantling this self-harming paradigm remain formidable.
The Ampel’s Downfall
From its inception, the “traffic light” (Ampel) coalition of the Social Democrats (SPD), Greens, and Free Democrats (FDP) was a fragile alliance. The SPD and Greens acknowledged the urgent need for public investment to address decaying infrastructure, the green transition, and housing shortages. Meanwhile, the FDP, led by Finance Minister Christian Lindner, clung to fiscal austerity, prioritizing deficit reduction over investment. He also worked at the EU level to obstruct reforms to the bloc’s fiscal framework, which would have allowed for more public investment.
The Ampel inherited Merkel-era policies that fetishized balanced budgets, grounded in the principle that government spending should not exceed revenues in any given year.
The black zero (Schwarze Null) was elevated to near-mythical status, and the constitutionally enshrined debt brake (Schuldenbremse)capped new federal borrowing at just 0.35% of GDP annually, adjusted for the economic cycle. Attempts to square the circle of investment and fiscal restraint through gimmicks like off-budget funds and “special vehicles” ultimately faltered.
The turning point for the coalition came in November 2023, when the Constitutional Court blocked the use of €60 billion in leftover COVID recovery funds for green investment. This ruling left the Ampel paralyzed. By the 2025 budget negotiations, the coalition was hopelessly divided: Lindner insisted on strict adherence to the debt brake but rejected tax hikes for top earners, while the SPD and Greens refused cuts to welfare programs. Unable to reconcile these differences, the coalition fell apart.
The Puzzle of Germany’s Austerity Fetish
Germany’s fiscal orthodoxy is perplexing, not only because of its visible costs but because it runs counter to the interests of key stakeholders, including the export sector. This powerful industry, supposedly championed by pro-business liberals and conservatives, has long warned that underinvestment threatens its competitiveness.
“A federal fiscal policy oriented towards balanced budgets is ill-advised… It would be fatal to let the ‘Schwarze Null’ block future-oriented investments,” declared Germany’s industrial lobby in 2021, in the runup to the federal elections. Yet an investment drive never materialized.
The consequences are stark: Deutsche Bahn’s unreliable service, dilapidated school buildings, closed motorway bridges, and some of Europe’s slowest broadband. According to the German Economic Institute, four of five companies cite poor infrastructure as a drag on operations. For much of the last decade, net public investment was negative, failing even to cover depreciation.
Economists estimate that Germany needs €450–500 billion in public investment over the next decade to modernize its infrastructure and meet its climate goals. Yet the debt brake limits new borrowing to a fraction of this figure.
The defenders of fiscal discipline often point to a lack of planning capacity as the real bottleneck. But this is a self-inflicted wound. Years of austerity have hollowed out the public sector, leaving it ill-equipped to design and execute major projects. The result is a vicious cycle: underinvestment leads to capacity constraints, which in turn are used to justify further underinvestment.
Meanwhile, with industrial policy back in vogue globally, the US and China are showering their firms with subsidies. German industry fears being left behind, yet fiscal orthodoxy remains a political straitjacket. Why has policy diverged so sharply from the clear interests of businesses and citizens?
Export-led Growth: A Fig Leaf for Domestic Stagnation
Germany’s fiscal orthodoxy didn’t survive because austerity worked—it survived because booming exports masked its failures. External demand, particularly from the US and China, offset the domestic stagnation caused by wage restraint and chronic underinvestment.
German exports to China more than tripled from €22 billion in 2007 to €69 billion in 2020, fueled by China’s state-led investments in infrastructure and industrial upgrades. The US, too, absorbed a large share of German exports, with its consumption-driven economy propping up demand. These flows made austerity’s costs politically tolerable.
The pattern is clear. When global shocks disrupted export markets in 2008 and during the COVID-19 pandemic, Germany briefly abandoned austerity, suspending fiscal rules and deploying emergency spending—€1.3 trillion during the pandemic alone. But as soon as external demand rebounded, austerity returned, with these moments treated as exceptions rather than lessons.
Now, however, external demand is structurally weakening. The US is reshoring its industrial base, prioritizing domestic production even at higher costs. Meanwhile, China’s economic development means it increasingly produces high-value goods domestically, reducing its reliance on German imports.
The demand that sustained Germany’s export machine was never guaranteed—it was political, shaped by its trading partners’ fiscal and economic strategies.
The Political Allure of Austerity
If austerity has proven so self-harming, why does it persist? Part of the answer lies in the Schwarze Null and debt brake’s success as political products. They simplify complex economic realities into morally resonant myths, drawing on cultural memories of Weimar-era hyperinflation and the ideal of the frugal Swabian housewife, balancing her books with diligence.
Yet this romanticized prudence never made sense as macroeconomic policy. One person’s spending is another’s income; when everyone saves at once, the economy grinds to a halt. Worse still, austerity is portrayed as intergenerational justice, as if leaving basic infrastructure to decay and procrastinating on climate action would somehow benefit future generations.
Politicians have leaned into these moralizing myths. When Wolfgang Schäuble retired, colleagues posed for a wholesome farewell photo, forming a human black zero, solidifying its meme-ified status. For voters, this well-rehearsed narrative of frugality is easy to grasp, and they don’t necessarily connect it to crumbling railways and patchy broadband.
The CDU has consistently held an advantage in polls asking which party is best equipped to handle Germany’s economic challenges. During Schäuble’s tenure as Finance Minister (from 2009 to 2017), this perception peaked, with over 40% of respondents naming the CDU, compared to under 15% for the SPD. This reinforces the argument that fiscal conservatism was not only a cornerstone of CDU policy but an electoral asset.
Defending fiscal orthodoxy also provides political actors with an easy platform.
In the current parliamentary cycle, the FDP jumped in to capitalize on its appeal. Meanwhile, the CDU/CSU weaponized fiscal conservatism by challenging green investments at the Constitutional Court, undermining the Ampel coalition. In the next parliament, another political entrepreneur may do the same. For instance, the far-right AfD, which frequently champions the debt brake, could seize the opportunity to loudly oppose any future government spending initiatives.
Where Next?
Germany now resembles the paradox of the unstoppable force meeting the immovable object.
The country urgently needs transformative public investment to fix crumbling infrastructure, transition to a green economy, and revive growth. Yet it remains constrained by fiscal conservatism, enshrined in the German constitution and EU rules.
Resolving this tension seems both obvious and impossibly hard.
The solution seems obvious because industry supports investment, markets are ready to finance it, and the benefits are clear. Germany’s industrial base already produces the machinery and goods used in grand infrastructure projects abroad, like China’s high-speed rail network or comprehensive digitalization drive. These resources could be redirected domestically just as external demand dries up.
Yet the solution feels impossibly hard because austerity has become a deeply ingrained political product, reinforced by its moral appeal and electoral utility. Regardless of the harm, political actors will always find it tempting to run on fiscal restraint.
Friedrich Merz, a likely successor to Scholz, is a staunch defender of austerity—but pressure from industry and a looming recession may force him to pivot. Recently, he hinted at a potential shift on the debt brake, snapping, “of course it can be reformed.” However, following backlash from his own camp—most notably from Markus Söder, leader of the Bavarian CSU—he quickly walked back any suggestion of reform. In this climate, muddling through—relying on off-budget gimmicks, particularly for defense spending—remains the most likely outcome.
Common EU-level borrowing, akin to the COVID recovery fund, is another proposed solution, with former ECB President Mario Draghi calling for €800 billion in annual investment in the EU. However, Merz swiftly dismissed the idea, pledging to do “everything he can” to prevent the EU from taking on new debt. Politically, this is understandable, given the pressure from the hardline anti-EU AfD. But for his country, it’s a huge missed opportunity. Draghi’s plan seems tailor-made to tackle Germany’s economic woes while also helping prevent fragmentation of the single market—a key worry for Germany’s firms, which depend on a well-integrated EU economy.
The stakes could not be higher. Germany’s industrial base, and the future of the broader European economy hinge on whether the country can shake its fiscal orthodoxy and embrace the investment it so desperately needs.
How to ‘Sell’ Debt-Financed Investments
If Germans love reasoning by analogy with firms and households—and they do—then it’s time to turn those favorite comparisons against austerity. Microeconomic analogies are rarely useful in macroeconomics, but in this case, they are. Industry leaders, who often sway conservatives’ agendas, are well-positioned to explain why this economic logic is deeply flawed.
When a firm invests in more efficient machinery, few would argue it should cover the entire cost from current revenue instead of financing it with credit. The value of the machinery is recorded as an asset on its balance sheet, so the firm’s net worth doesn’t decrease. The investment is also expected to yield returns over time, so the firm’s costs should also be spread.
Similarly, when a family takes on mortgage debt to buy a home, they don’t treat the cost as a one-off expense that wipes out their savings. Instead, they see their savings as ‘stored’ in a physical asset—one that provides crucial benefits. Why shouldn’t governments treat public investment the same way?
This logic reflects the pay-as-you-use principle in public finance: investments in railways or digital infrastructure benefit future generations, so their costs should be spread over time, not paid off in a single year. Borrowing ensures that those who benefit—through better infrastructure, cleaner energy, and a stronger economy—also share the cost.
Debt-financed investments, therefore, are not an argument for perpetual deficits but for distributing the tax burden more fairly over time—an approach that is compatible even with a conservative emphasis on balanced budgets.
The Swabian housewife, often celebrated as the model of frugality, would be smart enough to call a repairman when her roof leaks. Germany’s leaders, by contrast, seem content to stash cash away while the house crumbles around them. This isn’t prudence—it’s short-term political opportunism cloaked in moralizing myths.
