IMF: Germany Should Consider Easing Debt Brake

The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
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IMF: Germany Should Consider Easing Debt Brake

The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights

Germany faces rising spending pressures and the government should consider easing the debt brake, the International Monetary Fund said on Tuesday, but finance ministry sources said such a move carried the risk of fuelling inflation.

Altering the rules of the debt brake, which limits public deficits to 0.35% of gross domestic product, would require a two-thirds majority in the upper and lower houses of parliament.

"Germany's debt brake is set at a relatively tight level, such that the annual limit on net borrowing could be eased by about 1 percentage point of GDP while still keeping the debt-to-GDP ratio on a downward trend," the IMF said in a report.

This would allow more room for "much-needed" public investment, it said, according to Reuters.

In November, a court ruling blew a 60 billion euros hole in public finances and threw the government's financing framework into turmoil.

Although reforming the debt brake would ease fiscal consolidation, reforms to reduce medium-term spending pressures and increase revenues were also needed, the IMF added.

The brake is fiercely defended by Finance Minister Christian Lindner. According to finance ministry sources, the IMF recommendation carries risks.

"Reforming the debt brake harbours the risk of once again fuelling inflation, which has only just started to fall," said the sources, adding that higher debt also meant higher interest rate costs.

In its World Economic Outlook published in April, the IMF cut its forecasts for German gross domestic product to 0.2% growth in 2024 and 1.3% in 2025, expecting a gradual consumption-led recovery this year as inflation continues to ease.

A return to growth is expected to gradually reinforce confidence, further bolstering consumption in 2025.

Private investment is also expected to recover in 2025 on the back of improved demand and moderate monetary policy during 2024 and 2025. "As a result, GDP growth is projected to accelerate to between 1.0% and 1.5% during 2025-26," the IMF said.

Over the medium term, rapid population aging is expected to slow growth and adversely affect public finances.

As baby boomers retire and recent immigration waves subside, the annual growth rate of Germany's working-age population is expected to fall by around 0.7 percentage points, more than any other G7 country.

These unfavourable demographics are projected to slow annual growth to around 0.7% over the medium term.

The IMF said medium-term growth prospects could be bolstered by increasing public investment, including in the green transition and digitalisation.

To further boost productivity and entrepreneurship, the government should deepen efforts to cut red tape and promote digitalisation, the IMF advised.



Honda, Nissan and Mitsubishi Drop Talks on Business Integration

This combination of pictures created on February 13, 2025 shows the logo of Honda Motor (L) taken on February 6, 2025 at the company's showroom in Tokyo and the logo of Nissan Motor (R) being displayed at the company's showroom in Tokyo on February 13, 2025. (Photo by Kazuhiro NOGI / AFP)
This combination of pictures created on February 13, 2025 shows the logo of Honda Motor (L) taken on February 6, 2025 at the company's showroom in Tokyo and the logo of Nissan Motor (R) being displayed at the company's showroom in Tokyo on February 13, 2025. (Photo by Kazuhiro NOGI / AFP)
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Honda, Nissan and Mitsubishi Drop Talks on Business Integration

This combination of pictures created on February 13, 2025 shows the logo of Honda Motor (L) taken on February 6, 2025 at the company's showroom in Tokyo and the logo of Nissan Motor (R) being displayed at the company's showroom in Tokyo on February 13, 2025. (Photo by Kazuhiro NOGI / AFP)
This combination of pictures created on February 13, 2025 shows the logo of Honda Motor (L) taken on February 6, 2025 at the company's showroom in Tokyo and the logo of Nissan Motor (R) being displayed at the company's showroom in Tokyo on February 13, 2025. (Photo by Kazuhiro NOGI / AFP)

Japanese automakers Honda, Nissan and Mitsubishi said Thursday they are ending talks on business integration.
Nissan Chief Executive Makoto Uchida said the talks had changed focus from setting up a joint holding company to making Nissan into a subsidiary of Honda, The Associated Press reported.
“The intent was to join forces to win in the global competition, but this was not going to realize Nissan's potential, so I could not accept it,” he told reporters. He said that Nissan was going to aim for a turnaround without Honda instead.
Honda Chief Executive Toshihiro Mibe said in a separate news conference that Honda had suggested a stock swap to speed up decision-making.
“I am really disappointed,” Mibe told reporters. “I felt the potential was great, but I also knew actions that would bring pain were necessary to realize that."
The automakers agreed to end their agreement regarding the consideration of the structure for a collaboration, a joint statement said.
Honda Motor Co. and Nissan Motor Corp. announced in December that they were going to hold talks to set up a joint holding company. Mitsubishi Motors Corp. had said it was considering joining that group.
From the start, the effort had analysts puzzled as to the advantages to any of the companies, as their model lineups and strengths overlap in an industry shaken by the arrival of powerful newcomers like Tesla and BYD, as well as the move to electrification.
Honda and Nissan initially said they were trying to finalize an agreement by June and set up the holding company by August.
The three automakers will continue to work together on electric vehicles and smart cars, such as autonomous driving, they said Thursday.
In recent weeks, Japanese media had various reports about the talks breaking down, citing unidentified sources. Some said Nissan balked at becoming a minor player in the partnership with Honda.
Mibe denied he knew or heard anything about the media speculation that Taiwan's Foxconn was considering taking a stake in Nissan.
Honda is in far better financial shape and was to take the lead in the joint executive team. Honda reported Thursday that its April-December 2024 profits declined 7% to 805 billion yen ($5 billion).
Nissan reported a loss for the July-September quarter as its vehicle sales sank, prompting it to slash 9,000 jobs. At that time, Uchida took a 50% pay cut to take responsibility for the results.