Decoded No. 9: Germany’s Debt Brake Holiday (full note, PDF)

Decoded, analysis note No. 9. Driss EFFINA, PhD. October 2026. PDF, 27 pages, 14 charts and diagrams, 9 tables.

In March 2025 Germany amended its constitution to exempt defence spending above 1 percent of GDP from the debt brake, to create a 500 billion euro fund for infrastructure and climate neutrality over twelve years and to give the Länder a structural deficit allowance of 0.35 percent of GDP. Eighteen months later the federal government plans net borrowing of 181.5 billion euros in 2026 including special funds, the ten-year Bund yield stands at 3.42 percent, close to its highest level since 2011, and the economy is expected to grow 1.3 percent this year after three years of contraction or near-stagnation. Is the new borrowing pulling in private investment, or bidding up prices and interest rates? This note follows the money from borrowing authority to output.

Inside the full note:

• What changed in March 2025, and what the budgets say
• The disbursement gap
• Additionality: how much is new money?
• The fiscal impulse and its multipliers
• Crowding in: what the evidence shows so far
• Crowding out at home: prices, labour and Bunds
• An absorption capacity indicator
• The euro area: German supply and French and Italian spreads
• Scenarios to 2028
• Leading-indicators dashboard
• Implications for policy and for investors
• What to watch

Read the free preview: Germany's Debt Brake Holiday.