Germany's Merz cools hopes for another debt brake reform

By Maria Martinez

BERLIN, July 15 (Reuters) - German Chancellor Friedrich Merz on Wednesday all but ruled out another reform of the debt brake during this parliamentary term, the first time he has spoken so clearly about the prospects for changing the borrowing limit.

"The hurdles for another amendment to the debt brake are extremely high," Merz said. "In that respect, I am not very confident that we will manage to set another amendment to the debt brake in motion during this government's term." 

The debt brake is enshrined in the constitution, and any change would require a two-thirds majority in both chambers of parliament, the Bundestag and Bundesrat, meaning the coalition would need support from opposition lawmakers.

Even within the coalition, there is not a unified position on the topic, Merz said.

The government included in its coalition agreement the establishment of an expert commission to develop a proposal for modernising the debt brake, which restricts public borrowing to 0.35% of gross domestic product.

The commission started its work in September of last year and is expected to deliver "at least two, possibly even three different ideas and proposals" to the government, instead of one single unified proposal as other commissions of experts have done.

Initially, the second reform of the debt brake was expected to be completed by the end of 2025.

FIRST REFORM TOOK ITS TOLL

Before the 2025 federal election, Merz had promised not to undermine the debt brake.

But only weeks after the election, Germany's parliament approved plans for a massive spending surge, including a €500-billion special fund for infrastructure, which is excluded from the debt brake, and a broad exemption for defence spending from the borrowing cap.

Merz acknowledged the move had dealt a significant blow to his credibility, but said he could stay the course as Germany's top credit rating was not at risk and it could still refinance on favourable terms.

Germany remains the euro zone's anchor of stability, he said, adding he would change course if those conditions no longer held.

"Then we would have to slam on the brakes," Merz said.

(Reporting by Maria Martinez; additional reporting by Miranda Murray, Christian Kraemer and Andreas Rinke, editing by Matthias Williams and Ros Russell)