Germany discovers the cost of its cost-cutting measures

Germany is discovering today what it spent twenty years denying: a state can ruin itself without running into debt.

For a generation, Berlin presented fiscal discipline as the supreme form of public responsibility. Deficits were suspected of moral weakness, borrowing was equated with shifting a burden onto future generations, and high debt was elevated to a key indicator of good management. The whole of Europe lived under the shadow of this doctrine.

Its historical error was to confuse the state of the accounts with the state of the country, because a budget is not a snapshot of national prosperity. A nation can display respectable accounts while allowing the material foundations of its wealth to degrade: and that is precisely what Germany did.

While the Budget Saved

For years, the model seemed invulnerable. Cheap Russian gas fueled industry, China absorbed exports, and trade surpluses reassured leaders. As long as the machine kept running, warnings about congested railways, aging bridges, inadequate electrical grids, or digital delays could wait.

On December 16, 2025, as the last car rolled off the production line at Volkswagen’s Dresden plant, the site transitioned notably into research. This industrial crisis has multiple causes, and in this respect, Dresden provides a striking image: a land of Volkswagen seeking a new vocation for its own workshops.

The accounts were doing well, to be sure. Alas, the national capital was wearing out.

The European budgetary debate long maintained this confusion, treating public investment as just another expense. Yet, a state does not truly save money when it postpones the renovation of a bridge; it merely shifts the bill into the future. Repeated for twenty years, this logic wears down far more than equipment: it jeopardizes the very capacities upon which future prosperity depends. A company that stopped maintaining its machinery would temporarily post better results. No serious analyst, however, would see this as proof of good management. Why apply a different reasoning to states?

The famous constitutional debt brake is not the sole culprit for the current situation. However, this rule gave moral legitimacy to the idea that borrowing is always more dangerous than postponing.

Postponing also has a cost—one that does not immediately appear in annual public accounts, but manifests in rail delays, logistical bottlenecks, emergency repairs, discouraged private investments, and a progressive loss of competitiveness.

While the budget was saving, the country was paying.

The Transition and the Sorting Yard

In March 2025, Berlin pushed through a constitutional reform allowing the creation of a 500-billion-euro fund for infrastructure and climate neutrality, as well as exempting defense and security expenditures exceeding 1% of GDP from the debt brake. More than just a budgetary shift, this reform was an admission. Clearly, the old balance was no longer sustainable. Moreover, the initial effects measure this transition, which gave the euro zone a fiscal impulse of 0.5% of GDP, essentially driven by German defense and infrastructure spending.

Germany therefore possessed a capacity for action far greater than its own orthodoxy claimed to allow.

While this transition is welcome, a second illusion now threatens. Germany, once convinced that limiting debt was enough to guarantee prosperity, might now believe that simply spending billions is enough to restore it. Yet, nothing is less certain because—according to the IW and Ifo institutes—about 90% of the fund’s initial expenditures merely replaced existing financing instead of creating new investments. An expense can change budgetary columns without changing economic reality.

What a Country Passes On

Be that as it may, Berlin expanded its national freedom without prompting a comparable overhaul of European rules. The framework adopted in 2024 continues to require, under certain conditions, that countries whose debt exceeds 90% of GDP achieve an average reduction of one percentage point of GDP per year. While Germany has carved out new leeway for itself, its neighbors must still fight for theirs.

None of this excuses French spending that protects rents rather than capacities. But the lesson is not that debt is inherently virtuous or culpable. Debt is judged by what it finances—just as abstinence is judged by what it lets wither away. Germany’s mistake was to measure prudence with the wrong instruments. For a fiscal policy should not be judged solely by the debt it avoids, but by the state of the country it passes on.

Such is the true European lesson. Impeccable accounts can coexist with degraded bridges, saturated networks, and a weakened industry. Higher indebtedness can finance the capacities that will make tomorrow’s debt manageable. The question is not only how much a state borrows, but also what it leaves behind.

Germany spent two decades teaching Europe the discipline of numbers. It must now face a far more complex challenge: rebuilding capacities, because a nation does not prosper thanks to the columns of a budget. Accounts can reassure for a moment, a year, or even a decade.

The capacity to produce, innovate, and build—in short, vital energy—decides the rest.