Bundesbank calls for radical change: Merz under pressure!

Bundesbank calls for radical change: Merz under pressure!

On May 12, 2025, Bundesbank President Joachim Nagel expressed clear demands on the federal government under Chancellor Friedrich Merz (CDU) regarding a necessary realignment of economic policy. In his statement, Nagel emphasized that it is crucial to overcome barriers that hinder economic growth in Germany.

Measures to improve infrastructure, expand the workforce, digitalization and accelerate public services are particularly important. In addition, Nagel called for reducing bureaucracy and strengthening the country's defense capability. In this context, he praised the formation of a special fund of 500 billion euros for infrastructure expansion, which was decided on March 4, 2025 by the Union and the SPD during coalition explorations.

Details about the special fund

The special fund is to be set up over a period of ten years, with 100 billion euros being allocated to the states and municipalities. They also receive expanded options for taking out their own loans. With regard to defense spending, an exception is being sought that would allow spending over one percent of gross domestic product (GDP) to be exempt from the debt limits of the Basic Law.

However, the decision to reform the debt limit postpones the discussion about the financing of civil and military spending. Nagel emphasized the exceptional nature of these measures and warned that additional debt should be viewed as a unique opportunity. The Federal Audit Office, however, criticized the insufficient counter-financing of federal spending and pointed out the federal government's high net borrowing, which in 2024 exceeded the requirements of the Federal Constitutional Court.

Fiscal responsibility and debt ratio

Germany currently has a debt ratio of 63.6% of GDP, with a public deficit of 3.6% in the euro area. EU fiscal rules require member states to reduce their debt through four-year debt reduction plans. In particular, states with debt between 60% and 90% of GDP are required to reduce this by 0.5 percentage points annually.

Nagel made it clear that not all problems can be solved with additional spending and called for a reduction in the debt ratio after an adjustment period. At the same time, the obligation to comply with European fiscal rules remains unchanged. The discussion about financing through taxes and the associated financial burdens on citizens shows that the agreement on coalition explorations does not solve all of the state's fundamental problems.

Germany also has the second highest corporate taxes in the EU, which further complicates the economic situation. The allocation of 100 billion euros to states and municipalities raises additional questions about the distribution of competences and highlights the challenges that the government faces.

In view of the European initiatives to coordinate defense procurement and the associated reforms, it is clear that the course for the future of the German economy and defense policy is currently being set decisively.

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