It will no doubt be necessary to revisit a few commonplaces on the heaven and hell of investment in Europe. In European investment paradise, debt is German, property is British and infrastructure is French. In hell, the debt is French, the infrastructure English and the real estate German.
Since the radical change in direction to the budget recently decided by the future Chancellor Friedrich Merz, German debt has certainly not gone to hell, but it has come closer to purgatory. Rumour has it that when the German ambassador to the European Union proposed lasting adjustments to the rules of the Stability Pact to his peers at the beginning of March, certain representatives of countries with previously lax budgetary habits took great pleasure in offering their services to advise Germany on all possible ways of spending.
Germany did not need any advice to vote in favour of major changes to its constitutional automatic debt brake (Schuldbremse), which until then had limited the federal budget’s structural deficit to 0.35% of GDP. It is important to appreciate the fundamental significance of this reform, even though it is limited solely to defence and infrastructure spending (via a special ad hoc fund for the latter). Even if the Schuldbremse was not implemented until 2009, at the time of the great financial crisis, and even if the radical change in the geopolitical context, in particular the unravelling of the transatlantic link, were over-determining, it would be no exaggeration to compare the importance of Germany’s conversion to the Keynesian credo to the shock that Luther’s conversion to the dogma of papal infallibility would have created.
Despite this increased budgetary room for manoeuvre, the quality of German debt has not been called into question. A long history of scrupulous management of its public finances has given the country considerable freedom of movement. Nevertheless, the Merz reforms have changed the nature of the German bond market. Today, Switzerland is home to the last bond sanctuary that has yet to be desecrated.
Of all the European debt securities still rated AAA, those issued by the Confederation are the only ones to still have an additional reinsurance mechanism that automatically limits the growth of public debt. Is this sanctuary of borrowing a blessing or a curse for Switzerland? The question arises in the same terms as the recurring one about the national currency and the ambivalent effects of its safe-haven status on economic growth. A simple comparison of the macroeconomic performance of the debt-ridden French model with that of the Swiss and German models, where public debt is strictly controlled, is enough to show that there is no growth benefit from the former over the latter.
In 2001, a law enshrined a debt brake in the Swiss Federal Constitution. Adopted by 85% of Swiss voters, the law aims to prevent chronic deficits. Article 126 of the Constitution enshrines the principle of a long-term balance between public expenditure and revenue.
Article 126 restricts the budgetary powers of the executive and legislative branches, by limiting expenditure to the amount of ordinary revenue. However, it does not prohibit extraordinary expenditure in the event of a serious crisis or unforeseen event, such as the Covid-19 pandemic. Parliament or the Federal Assembly can therefore raise the spending ceiling and provide for extraordinary expenditure (limited to 0.5% of GDP), in a budget that is also subject to the debt brake. Imbalances in the extraordinary budget must be offset after six years and are managed through a depreciation account.
The expenditure ceiling is set by the financial administration, which calculates ordinary revenues on the basis of the ratio between actual growth and potential growth using a methodology identical to that used by the European Commission. When the actual growth of the Swiss economy exceeds its trend and the revenue recorded exceeds the expenditure ceiling, the excess revenue is credited to a compensation account, and vice versa. The compensation account is therefore increased in times of expansion and reduced in times of recession, thereby stabilising the public accounts.
In both Switzerland and Germany, the debt brake has been highly effective in containing the deterioration in public finances during a particularly trying period of successive crises. For the past fifteen years, the Swiss public debt ratio has been stable at around 40% of GDP (source: OECD), while Germany’s has averaged 70%, compared with 89% for the eurozone (source: Eurostat).
Above all, these measures have not had any recessionary effect. Quite the contrary, in fact. A comparison of GDP per capita ratios between Switzerland and France is particularly telling in this respect. In 2004, French GDP per capita was 62% of Swiss GDP. It will collapse to 44% by 2022. Over the same period, France’s debt-to-GDP ratio rises from 65% to 113%, limiting to say the least the scope of the generally accepted idea that leveraging public debt provides additional growth
The example of Germany says the same thing. Between 2009 and 2018, average growth in Germany (1.9%), like in Switzerland, was higher than in France. In 2022, Germany’s GDP per capita will also be 17% higher than France’s, reflecting both the $4,500 increase German GDP per capita and the slight decline in French GDP per capita between 2011 and 2021. Contrary to popular belief in France, Germany’s rigorous management of its public finances has never been detrimental to the prosperity of its people. The stagnation of German GDP between 2019 and 2024 can be explained primarily by the collapse of its economic model caused by the reorganisation of international trade flows that began in 2018 and the end of denial about the potentially harmful consequences of extreme dependence on Russian energy.
“The comparison between Switzerland and France has one merit. It shows that countries with healthy public finances are also more resilient. They have the means to react to unforeseen exogenous shocks without placing themselves in financial difficulty”. (François Facchini, “Freiner l’endettement : le modèle suisse”, Commentaire, Printemps 2025)