How to Finance Germany’s Modernisation

Executive Summary

Germany faces a €782 billion modernisation gap by 2030. The country must urgently invest in education, decarbonisation, defence, and infrastructure to remain competitive and resilient in the face of demographic shifts, climate change, and geopolitical risks. Yet politics has failed to deliver a stable financing framework, stuck between unrealistic spending cuts and a politically unattainable constitutional reform of the debt brake. Without decisive action, underinvestment will persist, eroding Germany’s long-term economic and social foundations.

Existing debt brake mechanisms already allow for substantial investment. Financial transactions (loans and equity injections into state-owned or public-purpose companies) and the cyclical component (borrowing linked to economic capacity) can together finance more than half of the identified needs. These mechanisms would cover large parts of infrastructure, education, health, and defence. But they are legally complex, less transparent, and costlier than straightforward state borrowing, making them an imperfect but workable short-term solution.

Essential but non-productive expenditures require stable revenues. Personnel costs for childcare, education, security, diplomacy, and climate adaptation—amounting to €117.5 billion—cannot be debt-financed under current rules. Covering them from tax and other revenues is unavoidable. Failing to secure these resources risks undermining critical public services and weakening resilience at a time of heightened external pressures.

Municipalities are a fiscal weak point. Local governments face €218 billion in additional needs, mostly for schools, childcare, roads, and climate protection. Yet their borrowing capacity is tightly constrained, with €30 billion in legacy debt and widening deficits. Without dedicated support, municipalities will continue to underinvest, jeopardising the delivery of core modernisation goals at the local level.

Redefining “sustainable public finances” is indispensable. While the debt brake offers limited short-term flexibility, its design is rigid, opaque, and inefficient. True fiscal sustainability must account for the growth-enhancing role of public investment, not just deficit reduction. Aligning German rules with EU fiscal frameworks would lower costs, simplify procedures, and restore legitimacy, while preparing the ground for a long-term reform of the debt brake.

Policy recommendations

1. Exploit existing debt brake flexibility by scaling up financial transactions and reforming the cyclical component to reflect potential-expanding policies.
2. Secure stable revenues for essential services by broadening tax bases, closing loopholes, and reallocating expenditures.
3. Establish permanent municipal investment promotion programme co-financed by federal and state governments, designed as financial transactions to ease pressure on the debt brake.
4. Reframe fiscal sustainability to recognise productive public investment as a pillar of responsible finance, aligned with EU growth-friendly fiscal rules.
5. Lay the political groundwork for debt brake reform in the next legislative term to simplify financing, reduce costs, and enhance legitimacy.