What Happened
Germany's three-party coalition collapsed on Nov. 6, 2024, after a budget dispute over the debt brake. The debt brake, which was enshrined in Germany's constitution in 2009, limits annual structural deficits to 0.35% of GDP plus a small counter-cyclical component.
The collapse followed months of disagreement among the previous coalition partners. The three parties were unable to compromise on their differing spending priorities against limited budgetary space imposed by the debt brake, notably regarding fiscal measures to support Germany's weak economy, the green transition, and financial support for Ukraine.
Chart 1
Why It Matters
Germany's constrained fiscal policy could obstruct counter-cyclical measures. At an estimated 59% of GDP in 2024, Germany's government debt--net of liquid assets--is the second-lowest of all G7 countries, while its interest spending as a percentage of government revenue is the lowest. At the same time, however, each G7 country's post-pandemic GDP growth has outpaced that of Germany, whose 2024 GDP barely exceeds pre-pandemic levels.
Overall, Germany's credit metrics are strong. Apart from government fiscal metrics, our sovereign ratings also consider a country's institutional strength, its economic and external profile, and its monetary flexibility. We view Germany's credit metrics as strong in these three areas, which supports our 'AAA' long-term sovereign credit rating.
What Comes Next
We currently do not expect changes to the fiscal framework, even after early elections. After chancellor Olaf Scholz ousted one of his governing partners, snap elections are currently scheduled for February 2025. The debt brake will likely continue to determine Germany's fiscal policy. Any amendments to the rule would require a two-thirds majority in parliament. That said, exemptions to the debt brake are possible if the government declares an emergency situation, as happened during the COVID-19 pandemic. This could loosen the debt brake, depending on the next government's policy priorities.
Even if snap elections result in a stable government, policymaking will remain complex. Germany's political fragmentation has deepened over the past few years. Challenges that the next government will face include low economic growth, persistently subdued domestic demand, the effects of sluggish foreign trade on Germany's export-oriented economy, and the country's aging population.
This report does not constitute a rating action.
| Primary Credit Analyst: | Niklas Steinert, Frankfurt + 49 693 399 9248; niklas.steinert@spglobal.com |
| Secondary Contacts: | Christian Esters, CFA, Frankfurt + 49 693 399 9262; christian.esters@spglobal.com |
| Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
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