Germany's Debt Surge: Balancing Defense, Infrastructure, and Fiscal Stability

Germany's debt is expected to rise significantly by 2030 due to increased spending on defense and infrastructure. Fiscal flexibility may decline, necessitating structural reforms. Despite the higher debt, an infrastructure fund may boost economic growth, while defense spending's growth impact may be moderate.

Germany is bracing for a notable increase in its debt, projected to soar to 74% of its gross domestic product by 2030, up from 62.5% last year, according to a report from the European rating agency Scope. This increase is attributed to heightened spending on defense and infrastructure, a shift backed by Germany's parliament, which approved a considerable spending package in March.

Though the borrowing is on the rise, the pressure on the government to consolidate its core budget is expected to intensify over time, warns Scope analyst Julian Zimmermann. The mounting costs of interest payments and social security—covering pensions and healthcare—are set to decrease fiscal flexibility, Zimmermann noted.

The report suggests that the proportion of available funds in the federal budget could plummet from 24% to a mere 3% by 2035. To preserve financial maneuverability, the report recommends structural reforms, particularly in pensions and the labor market. Additionally, a substantial 500 billion euro infrastructure fund could potentially elevate Germany's economic growth rate to 1% from the current 0.7%, although the boost from increased defense spending is expected to be modest.

(With inputs from agencies.)