The German Bundestag just made a historic decision today. A decision that will finally break Germany’s debt brake.

This policy has been in place since 2009 and has helped reduce the country’s public debt over the past 10 years or so.

At the same time when other countries like the US and UK are still struggling with elevated debt.

As of today however, this change, which is driven by defence needs and economic stagnation, opens the door to €500 billion in new infrastructure spending over the next decade.

It also signals a departure from a decades-old economic doctrine that prioritized debt reduction above all else.

Why Germany’s debt brake mattered for so long

Germany’s debt brake capped federal borrowing at just 0.35% of GDP annually, with exceptions only for crises like recessions or natural disasters.

It was a product of the post-2008 financial crisis era, born from fears of spiralling deficits and inflation.

But its origins go deeper. Germany’s aversion to debt is tied to historical episodes, particularly the Weimar Republic hyperinflation of the 1920s and the borrowing surge after reunification in the 1990s.

Both events have left deep political scars.

This fiscal restraint became a point of national pride. By 2020, Germany had significantly reduced its debt ratio, while countries like the US and UK saw theirs climb.

The Bundesbank and many German politicians regarded the debt brake as essential to maintaining financial stability and global credibility.

But this fiscal conservatism has also constrained government investment in critical infrastructure over the years.

Roads, railways, and digital infrastructure are some examples of where Germany is being criticised for lagging.

Additionally, military spending remained below NATO’s 2% GDP target, something that soon is about to change.

Why did it break now?

Pressure to rethink the debt brake has been building for years. Germany’s net public investment has been negative for over 25 years, holding back growth.

Key sectors like transportation, digital infrastructure, and defence have seen chronic underfunding.

In 2024, the German Institute for Economic Research reported that public capital stock was deteriorating at a rate not seen since the 1980s.

The catalyst for change came from abroad. With Donald Trump back in the White House and openly questioning NATO commitments, Germany faced the prospect of reduced American security support.

German lawmakers argued that without U.S. protection, Europe’s largest economy needed to invest more in its defence.

The situation was further aggravated by economic stagnation. Germany’s GDP contracted 0.3% in 2024, the second consecutive year of decline.

Business leaders and economists alike warned that without large-scale investment, Germany’s industrial base risked falling behind global competitors.

Even the Bundesbank, historically opposed to deficit spending, acknowledged that government investment was urgently needed.

What was voted and why it matters

On March 18, the Bundestag approved a constitutional amendment with 513 votes in favour and 207 against, surpassing the two-thirds majority required.

The package includes a €500 billion infrastructure fund over 12 years and exempts all defence spending above 1% of GDP (roughly €45 billion) from debt limits.

Additionally, German states are now allowed to borrow up to 0.35% of their GDP annually.

This is a big move for Germany.

For the first time, the country will fund large-scale public investments with long-term debt outside the regular budget.

The package earmarks €100 billion for climate initiatives and €100 billion for state-level projects.

The rest will go to railways, roads, bridges, schools, and hospitals. Those are the defined areas where underinvestment has been most severe.

In terms of defence spending, instead of relying on American-made weapons, Germany will now prioritize European manufacturers.

Planned purchases include six F127 battleships from Thyssenkrupp Marine Systems (valued at over €15 billion) and 20 Eurofighter jets from the BAE-Airbus-Leonardo partnership (worth €3 billion).

In comparison, Germany’s defence fund which was approved in 2022 favoured US firms like Lockheed Martin and Boeing.

What comes next?

The next hurdle is the Bundesrat, Germany’s upper house, which must also approve the constitutional change with a two-thirds majority.

A vote is scheduled for Friday.

Given the support from Bavaria’s CSU and other key states, passage is likely, but not guaranteed.

Legal challenges are already looming. The far-right AfD and other fiscal conservatives argue that the reform undermines democratic oversight and risks unsustainable debt levels.

Courts have so far allowed the legislative process to proceed, but the issue could remain contested for months.

Beyond legal battles, the real question is execution. Germany’s public sector has long struggled with project delivery.

Regulatory hurdles, bureaucratic delays, and political infighting could dilute the impact of new spending.

The DIHK (German Chamber of Commerce) has warned that unless the funds are used efficiently, rising debt service costs could outweigh the benefits.

Will this change Europe’s economic direction?

Germany’s decision has broader implications.

For the past years, the EU’s fiscal rules which were influenced by German policies, have limited borrowing across the bloc.

Loosening the debt brake at home could soften Germany’s stance on EU-wide spending limits, especially as France, Italy, and others push for greater budgetary flexibility.

It also raises the stakes for European defence.

By choosing to spend big on European weapons and military infrastructure, Germany is effectively betting on a more autonomous European security strategy.

This could reshape NATO dynamics and shift the balance in Europe’s defence industry, where US firms still dominate.

Most importantly, the reform indicates that Germany is willing to prioritize growth and security over debt reduction, a significant departure from its post-crisis orthodoxy.

Investors are already feeling optimistic about future growth, evident by the DAX 30 index rising by 0.98% over the day of the announcement.

The index even briefly reached its all-time high during the trading day.

However, whether this shift leads to sustained economic recovery or fiscal instability will depend on how well Berlin manages the influx of new debt, and whether it delivers real improvements on the ground.

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Bo Hines, executive director of the President’s Council of Advisers on Digital Assets, has signaled that comprehensive stablecoin legislation is imminent, with finalization expected in the coming months.

Speaking at the Digital Asset Summit in New York on March 18, Hines emphasized the urgency of maintaining the US dollar’s dominance in on-chain financial activity.

His remarks come after the Senate Banking Committee approved the GENIUS Act last week.

The legislation, formally known as the Guiding and Establishing National Innovation for US Stablecoins Act, aims to establish regulatory frameworks for stablecoin issuers, including collateralization requirements and compliance with anti-money laundering laws.

“We saw that vote come out of the Senate Banking Committee in an extremely bipartisan fashion, […] which was fantastic to see,” Hines said.

He stressed that bipartisan support underscores the national interest in preserving US leadership in the digital asset space.

“I think our colleagues on the other side of the aisle also recognize the importance of US dominance in this space, and they’re willing to work with us here, and that’s what’s exciting about this,” he said.

“You know, there’s not many issues in Washington, DC, in which folks can come together from both sides of the aisle and propel the United States forward in a way that’s comprehensive,” he added.

When asked about when stablecoin legislation will be passed, Hines said, “I think that stables could be on the president’s desk here in the next two months.”

Right now, the market seems to be underestimating what this bill “could do for the US economy in terms of US dollar dominance, in terms of payment rails, in terms of altering the course of financial markets,” said Hines.

Reinforcing the dollar’s dominance

The US dollar continues to be the primary currency backing stablecoins, with digital dollars accounting for most of the $230 billion stablecoin market.

These assets play a crucial role in cryptocurrency trading, remittances, and digital payments, further entrenching the dollar’s global influence.

While some experts foresee a shift toward multicurrency stablecoins, the dominance of dollar-backed assets remains unchallenged.

White House emphasizes the strategic role of stablecoins

US Treasury Secretary Scott Bessent has reaffirmed the Trump administration’s commitment to leveraging stablecoins as a tool for maintaining the dollar’s status as the world’s reserve currency.

Speaking at the White House Crypto Summit on March 7, Bessent highlighted the administration’s focus on a well-regulated stablecoin regime.

“We are going to put a lot of thought into the stablecoin regime, and as President Trump has directed, we are going to keep the US [dollar] the dominant reserve currency in the world, and we will use stablecoins to do that,” Bessent said.

With stablecoins becoming increasingly embedded in global finance, regulatory clarity could bolster the US financial system’s competitiveness while reinforcing the dollar’s dominance in digital asset markets.

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The Bank of Japan (BOJ) on Wednesday kept its key policy rate unchanged at 0.5% in a unanimous vote, in line with market expectations.

The decision comes as policymakers assess the potential impact of US President Donald Trump’s protectionist trade policies on Japan’s export-driven economy.

BOJ officials acknowledged that while Japan’s economy has been recovering moderately, there are signs of weakness in certain areas.

In a statement, the central bank cited “high uncertainties surrounding Japan’s economic activity and prices, including the evolving situation regarding trade … and domestic firms’ wage- and price-setting behaviour.”

The decision comes ahead of the US Fed’s policy meeting, where the central bank is expected to keep its benchmark interest rate steady.

Inflation pressures and wage growth

The BOJ noted that inflation expectations have risen moderately, pointing out that “rice prices are likely to be at high levels and the effects of the government’s measures pushing down inflation will dissipate” through fiscal 2025.

The decision to hold rates comes as the central bank monitors inflationary pressures stemming from wage gains and food price increases.

Japan’s largest labor union, the Japanese Trade Union Confederation (Rengo), announced last week that it secured an average wage increase of 5.46% from April, marking the highest gain in over three decades.

The first round of wage negotiations covered 760 unions and was 0.18 percentage points higher than last year’s 5.28% increase.

Small and medium-sized businesses saw an average wage increase of 5.09%, marking the first time since 1992 that wage hikes for such firms surpassed the 5% mark.

Meanwhile, UA Zensen, a labor federation representing retail and restaurant industry unions, reported an average wage increase of 5.37% for full-time workers, slightly below last year’s 5.91%.

Economic indicators and future rate hikes

Japan saw a two-year high inflation rate of 4% in January, with household spending beating expectations in December by rising 2.7% year-on-year—the fastest pace since August 2022.

However, household spending growth slowed in January to 0.8%.

The BOJ, which raised short-term rates to 0.5% from 0.25% in January after ending its long-standing stimulus program, has signaled that further rate hikes remain a possibility.

Some analysts expect a rate hike as early as May, particularly due to concerns over persistent inflationary pressures from rising wages and food prices.

However, the path forward for the BOJ has become more complicated following weaker-than-expected GDP figures released last week.

Revised fourth-quarter data showed that Japan’s economy grew at an annualized rate of 2.2%, a slower pace than initially reported and below economists’ median forecasts.

The BOJ has maintained that its goal is to establish a “virtuous cycle” of rising wages and prices.

However, with economic growth showing signs of slowing, policymakers may have to carefully balance their approach to tightening monetary policy in the months ahead.

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New Zealand’s economy likely eked out of recession in the fourth quarter of 2024, but growth remains sluggish, reinforcing expectations that the Reserve Bank of New Zealand (RBNZ) will continue easing monetary policy to stimulate demand.

GDP is projected to have expanded by 0.4% in the final quarter of the year, slightly ahead of the RBNZ’s 0.3% forecast.

The marginal rebound follows two consecutive quarters of contraction, which saw GDP shrink by 1.0% in the September quarter and 1.1% in the June quarter.

This marked the steepest non-pandemic-related downturn since 1991. Despite the recent uptick, the economy remains fragile, with key sectors still struggling to regain momentum.

Kiwibank economists predict a modest 0.3% growth rate, cautioning that the improvement is “muted” and does not signify a strong recovery.

Weak demand prompts further rate cuts

While the GDP expansion is a positive shift, economic indicators suggest that the broader growth impulse remains weak.

The RBNZ has already slashed the official cash rate by 175 basis points since August 2024, bringing it down to 3.75%.

The central bank has also signaled additional cuts of 25 basis points each in April and May to provide further stimulus.

Market expectations for continued rate cuts are underpinned by persistently weak demand, with several industries still under pressure.

Although tourism-driven sectors, including retail, hospitality, and transport, have shown signs of resilience, other areas, such as manufacturing and construction, are yet to recover meaningfully.

Utilities have seen a moderate rebound, but overall business confidence remains subdued.

Global trade risks threaten recovery

The global economic landscape adds another layer of uncertainty to New Zealand’s recovery.

Analysts highlight the potential impact of US President Donald Trump’s trade policies, particularly tariffs imposed on China.

New Zealand, which exports a significant share of its goods to China, faces potential headwinds if global trade conditions deteriorate.

The South Pacific nation has relied on strong export demand, particularly for dairy and agricultural products, to support growth.

However, heightened trade tensions could disrupt supply chains and dampen export revenues.

Economists warn that prolonged trade disruptions may weaken New Zealand’s external sector and add pressure on the RBNZ to take further accommodative measures.

RBNZ prioritises real-time data

Given the lagging nature of GDP data, the RBNZ has increased its reliance on higher-frequency economic indicators to gauge real-time economic conditions.

While the fourth-quarter GDP figures provide a snapshot of past performance, policymakers are looking at employment, consumer spending, and business investment trends to assess the economy’s trajectory.

Westpac senior economist Michael Gordon emphasised that technical factors in GDP calculations may have contributed to the reported growth, urging analysts to focus on annual trends rather than quarterly fluctuations.

Despite the modest improvement in the fourth quarter, significant slack remains in the economy.

ANZ economists note that New Zealand is still operating with “substantial spare capacity,” allowing room for growth without triggering inflationary pressures.

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British employers have not made any changes in pay increases in response to rising costs and an impending hike in payroll taxes, bringing wage growth back in line with inflation for the first time since October 2023.

Data from human resources firm Brightmine shows that the median pay award remained at 3% for the three months to February 2025, marking the joint lowest rate of increase since December 2021.

This stabilisation suggests that businesses are exercising greater caution as they navigate economic uncertainties, a trend likely to be welcomed by the Bank of England (BoE) as it assesses inflationary pressures in the labour market.

Employers brace for tax rise

With payroll taxes set to increase in April, many British businesses are taking a conservative approach to wage growth.

Brightmine’s data indicates that a quarter of firms are planning to put hiring freezes or restructure their teams in response to the tax changes.

Some businesses are considering pay freezes and postponing salary increases to manage rising operational costs.

This shift reflects concerns about maintaining financial stability amid broader economic pressures, including higher social security contributions and minimum wage adjustments.

The cautious stance among employers is evident in the consistency of wage growth figures over recent months.

The median pay award of 3% in the three months to February remained unchanged from the previous two quarters.

This is in sharp contrast to the wage growth acceleration seen throughout 2023, when inflation-driven pay increases were more common.

As employers anticipate higher tax burdens, wage growth is unlikely to pick up significantly in the near term.

Minimum wage hike pressures firms

Along with the payroll tax increase, the UK’s minimum wage is set to rise by nearly 7% in April, putting further pressure on businesses.

Brightmine’s analysis suggests that nearly three-quarters of employers expect this change to narrow the gap between their lowest and highest-paid workers.

Companies with a significant proportion of lower-paid staff may need to adjust salary structures across the board to maintain differentiation between roles.

This could lead to cost-cutting measures elsewhere, including delayed pay rises for higher earners or reductions in discretionary bonuses.

The impact of the minimum wage hike will be particularly significant in sectors with large numbers of lower-paid employees, such as retail, hospitality, and care services.

Many businesses in these industries are already operating on tight margins and could face difficult decisions about pricing, staffing, and overall workforce management.

BoE watches wage trends

The BoE is closely monitoring wage growth as a key indicator of inflationary pressure in the economy.

The latest data suggesting a stagnation in pay increases supports expectations that inflationary risks from the labour market may be subsiding.

In January, the UK’s consumer price index (CPI) stood at 3%, matching the latest wage growth figures.

While the BoE is widely expected to keep interest rates on hold following its March meeting, a continued easing of wage pressures could strengthen the case for rate cuts later in the year.

Policymakers have been cautious about lowering borrowing costs too soon, fearing a resurgence of inflation.

However, if pay growth remains subdued and inflation continues its downward trend, the central bank may have more room to manoeuvre on monetary policy in the coming months.

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