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Relax Germany’s debt brake, says Angela Merkel

Former chancellor’s memoirs back reform of borrowing cap that she introduced into constitution

Former chancellor Angela Merkel has called for Germany to relax its “debt brake”, in a sign of the growing political pressure to overhaul a borrowing cap that many economists say is too inflexible. 

Merkel, who served as chancellor between 2005 and 2021 and introduced the debt brake into Germany’s constitution, made the proposal for change in her autobiography Freedom: Memories 1954-2021.

It comes just days after Friedrich Merz, leader of Merkel’s party, the Christian Democratic Union, and the man polls suggest could become Germany’s next chancellor in snap elections next February, indicated for the first time that the rule could be modified. 

The debt brake caps new borrowing by the federal government at 0.35 per cent of GDP, adjusted for the economic cycle, and also bars Germany’s 16 individual states from taking on any new debt at all.

It was enacted into law in 2009 and took effect in 2016, though it was suspended during the Covid-19 pandemic and again after Russia’s full-scale invasion of Ukraine. It was reinstated this year.

Merkel insisted that the “idea of a debt brake in the interests of future generations is still right and proper”.

“But to avoid conflicts over resource distribution in society and adapt to the changes in the age profile of the population, it needs to be reformed to allow higher levels of debt to be assumed for the sake of investment in the future,” she went on.

Merkel said the war in Ukraine and Russia’s increasing belligerence meant Germany would have to “substantially” increase defence spending over the next few years, warning that the Nato target of spending 2 per cent of GDP on the military “will not be enough”.

Higher military expenditure, she said, would inevitably lead to “conflicts with other areas of policy”, especially as Germany will also have to spend 5 per cent of GDP on research and development, 0.7 per cent of GDP on international aid and “additional state funds” on the green transition.

Her intervention comes at a time when differences over the wisdom of the debt brake have become one of the main faultlines in German politics.

Parties of the left say it prevents the vast investments needed in Germany’s crumbling infrastructure and armed forces. Parties of the right, including Merkel’s party, the CDU, see it as a way of protecting future generations from an exploding debt burden.

The brake also triggered the collapse of Chancellor Olaf Scholz’s three-party coalition earlier this month. Scholz sacked his hawkish finance minister, Christian Lindner, after he refused to suspend the debt rule to allow for more aid to Ukraine. Lindner’s party, the FDP, then left the government.

But the CDU has also indicated flexibility on the debt brake. Speaking to a business conference earlier this month, Merz said only a few articles of the constitution were immutable. “Everything else can be debated,” he said.

The key issue, Merz added, was what the new borrowing arising from a loosening of the debt brake would be used for. He ruled out a reform that would simply allow more spending on welfare, for example.

But if the new borrowing were directed towards investments “then the answer can be different”, he said.

How a single capital market would unlock Europe’s potential

Improving access to capital is crucial to build on the continent’s proven strengths

It has become conventional wisdom to view Europe as an economic powerhouse past its prime, overshadowed by the steady advance of the US and meteoric rise of China. Critics cite Europe’s shrinking share of global GDP, excessive regulation, and sluggish investment as evidence of a “competitiveness crisis”. But this narrative obscures a more profound truth: Europe is brimming with untapped potential that, if fully harnessed, could dramatically reshape the global economic landscape.

Europe’s strengths in competitiveness, talent, innovation and sustainability could, when integrated within a unified capital market, radically transform its economic trajectory.

While many focus on the challenges of Europe’s larger economies, it is smaller nations — Denmark, Finland, the Netherlands, and Switzerland — that show what is possible. According to IMD’s World Competitiveness Ranking, these countries consistently outperform global peers, revealing the power of a robust commitment to nurturing talent and human capital through cross-border mobility and education.

While only 1 per cent of US and 2 per cent of Chinese students study abroad, 15 per cent of their European peers do so. This emphasis on global learning fosters a more interconnected workforce, one that embodies the spirit of integration essential for future success. In fact, EU citizens living in another member state have surged by 60 per cent over the past two decades, a testament to Europe’s commitment to cultivating a truly global citizenry.

The impact is palpable at the highest levels of business. Among the CEOs of Europe’s 20 largest companies, half are not citizens of the country where the headquarters is located. That compares with 20 per cent in the US and none in China. This diverse leadership leaves Europe uniquely placed to navigate the geopolitical complexities today.

Europe’s leadership in the energy transition also offers a blueprint for prosperity. It is ahead of the rest of the world, generating some 40 per cent of its power from renewables, outpacing China and the US, which generate 30 per cent and 21 per cent, respectively. Public support for green investment remains robust, with less partisan division, reducing the risk of drastic policy swings after elections. If anything, Europe’s efforts to become the first net-zero continent are accelerating as a result of Russia’s invasion of Ukraine.

Artificial intelligence is another arena where Europe can assert influence. While the notion that Europe regulates while the US and China innovate is a common critique, Europe’s measured approach — exemplified by the EU AI Act — may set a global standard. Data privacy rules offer a precedent. US tech companies have decried Europe’s strict rules, but comprehensive data privacy standards now protect three-quarters of the global population. And they have not held back European business. Can Europe do the same in establishing responsible AI practices globally?

History has shown us that Europe has been counted out before, only to rise again, often when least expected. This was evident in the implementation of the Single European Act in 1986, which launched the Single Market in response to growing competition from the US and Japan. Similarly, the creation of the euro and the region’s recovery from the global financial crisis demonstrate a resilient spirit. Today, as geopolitical tensions shift and the US grows increasingly unpredictable, Europe stands at another inflection point.

So, how can Europe seize this moment? By leveraging its competitive smaller economies, fostering a holistic and inclusive approach to sustainability and AI, and championing its global leadership in talent. Mario Draghi’s report on the future of European competitiveness makes numerous recommendations, including an ambitious €800bn investment spree. Yet, the most crucial step may be deceptively simple: a single European capital market.

What differentiates American and Chinese businesses from their European counterparts is superior access to capital, enabling them to scale up innovations and aggressively expand markets. Without deeper financial integration, Europe risks leaving much of its potential untapped. Creating an integrated European capital market would streamline access to funding and also empower innovative enterprises across the continent, enabling them to scale up and compete effectively on the global stage.

The benefits of this capital market are manifold. It would facilitate cross-border investments, enhance liquidity, lower costs, and improve the overall efficiency of resource allocation. By creating an environment more conducive to investment, Europe can nurture homegrown champions and attract foreign investment to fuel its growth.

Moreover, enhancing access to capital would enable European start-ups and small and medium-sized enterprises to thrive, unlocking innovation in sectors such as clean energy, digital technology, and advanced manufacturing. This, in turn, would bolster the continent’s position as a global leader in sustainability and technology.

But Europe is at a crossroads, with the potential to redefine its global standing. Without deeper financial integration, it risks leaving its potential untapped. Getting this one critical area right will enable Europe to harness its strengths and compete far more effectively than it currently does. 

Paris-based group considers moving co-founder to growing Bay Area office as it hires scientists, engineers and sales specialists

Mistral, Europe’s most valuable artificial intelligence start-up, is ramping up its US expansion in an effort to compete with Silicon Valley rivals for AI talent.

Paris-based Mistral is building out an office in Palo Alto, California, as it looks beyond its European roots for engineers and scientists, as well as expanding its US sales team.

One of Mistral’s three co-founders, Guillaume Lample, is also weighing a potential move from Paris, according to two people familiar with the company’s thinking. However, another person close to the company said no decision has yet been made.

The company, valued at €6bn during a €600mn funding round in June, has been hailed by the likes of French President Emmanuel Macron as evidence that Europe can compete with the US and China in developing cutting-edge AI.

Mistral’s expansion in California follows in the footsteps of many promising European start-ups that have been drawn to the US for talent, capital and customers, which often prove easier to attract in the world’s largest tech market.

Striking a transatlantic balance may be trickier for Mistral, which has established itself as an alternative to the dominance of US AI companies by offering “sovereign AI” to customers in Europe and other parts of the world.

It has increasingly fallen into the orbit of Silicon Valley, having been backed by venture firms such as Andreessen Horowitz and Big Tech groups including Microsoft and Nvidia.

Mistral is hiring a team of AI scientists and engineers in California, as well as sales and administrative staff, according to public job listings. Currently, Mistral says it employs more than 100 people, with Paris still home to the largest proportion of employees. It has around 20 staff in the Bay Area, according to staff listings on LinkedIn and a person close to the company, most of whom joined in the past six months.

Mistral’s new outpost lays down a challenge to rival generative AI companies such as OpenAI and Anthropic in the highly competitive war for talent raging in the sector. In April, Majorie Janiewicz joined the company as its first US general manager and global head of revenue.

The French company, which is still less than two years old, has sought to make efficiency its chief differentiator against its better-funded US rivals, arguing that it builds its AI models more cheaply. Nonetheless, AI has become a highly capital-intensive industry, and alongside powerful chips, top researchers and engineers are the hottest and most expensive commodities.

Staff from fast-growing start-ups such as Adept, Inflection and Character AI have been hired by Amazon, Microsoft and Alphabet respectively, with the Big Tech companies willing to pay billions of dollars in deals designed to absorb the best staff from the fledgling companies while stopping short of full takeovers.

Other leaders in the field are launching their own start-ups. Early employees at OpenAI, including former chief technology officer Mira Murati and chief scientist Ilya Sutskever, have left to launch their own businesses. Meanwhile, OpenAI itself recently opened an office in Paris, where Meta already has a significant AI lab.

Mistral’s own founding team previously worked at Meta and Google’s DeepMind. The company develops open-source AI models, allowing businesses and developers to access and customise them to suit their applications and needs.

Mistral said it was “continuing to reinforce its presence and commitments to growth in the US to offer American customers full control, privacy and portability in their AI journey”.

“To achieve it, Mistral has opened an office in Palo Alto and supported an executive presence on the ground . . . Our founders are committed to support this development,” the company added.

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The Cosmograph Daytona is still leading the pack after six decades

Coffee giant would benefit from a helping hand from a local partner

Starbucks’ determination to capture the attention of the Chinese consumer extended to offering a pork-flavoured latte in the country earlier this year. The limited edition drink is made of espresso, steamed milk and Dongpo braised pork flavour sauce topped with extra sauce and pork meat as garnish. Such product “innovation”, however, hasn’t cut it: operating in the country is no easy task, particularly given fierce local competition.

Starbucks had almost 7,600 outlets in China as of late September and the country accounts for about a fifth of the group’s global total. It is still expanding in China, increasing the number of its stores by more than a tenth in the latest financial year. Starbucks had a 14 per cent market share of China’s café market in 2022, according to the most recent available data.

That makes it an attractive target for Chinese groups, including domestic coffee chains. Starbucks, which is reported to be exploring options for its Chinese operations — including the possibility of selling a stake in the business — would also benefit from a helping hand from a local partner.

The buyer, if not already in the coffee chain business, would have to be prepared to deal with extreme competition, which is now hotter than ever thanks to two local rivals: Luckin Coffee and Cotti. These Chinese rivals are a step ahead in terms of local trends, including automation — and offer much cheaper coffee too.

The pace of growth of domestic coffee chains has been impressive in the past year. Luckin’s performance has been especially strong. It has proved sceptics, who once saw its ultra-cheap coffee prices and high costs as a flawed business model, wrong this year. Luckin Coffee’s operating margin hit 15.3 per cent in the latest quarter as net revenues rose more than 40 per cent to $1.5bn, adding to annual sales that nearly doubled last year. It opened 1,400 new stores in the latest quarter, bringing its total to 21,300. Meanwhile, signs of the pressure are showing with same-store sales at Starbucks down 14 per cent in China last quarter.

Automation, a rapidly growing trend in the local coffee chain industry, is helping margins during a time when costs are rising, especially delivery, sales and marketing expenses. Cotti, which has grown rapidly since it was founded in 2022, is pushing out coffee-making robots. Luckin has fully automated pour-over coffee machines. Luckin’s coffee robots and unmanned coffee shops were key to maintaining growth during the pandemic.

Valued at an industry multiple, the Chinese operations of Starbucks could be worth about $12bn. Like the different drinks on the menu, each market increasingly requires distinct strategies to stay ahead of the competition.