Germany advisers warn defence borrowing risks straining budget

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Germany defence borrowing warning

Highlights

Germany’s Council of Economic Experts urges Chancellor Friedrich Merz to curb debt-financed defence spending to avoid excessive budget strain from higher interest costs.
The council recommends phasing out defence borrowing after 2031 by raising the budget threshold for military spending by 0.25 percentage points annually, forcing greater reliance on taxes or spending cuts.
Germany’s planned €780bn Bundeswehr outlay to 2030 will drive growth to 1.3% this year but heighten long-term fiscal risk, requiring 4.6% of GDP in consolidation by 2040.

Advisers outline path to rein in defence debt

As reported by Financial Times, Germany’s Council of Economic Experts says Chancellor Friedrich Merz should curb debt-financed defence spending before higher interest costs place exceptional strain on the federal budget.

The five-member body said on Wednesday that expenditure growth will need to be capped and fiscal consolidation designed in a way that does not undermine economic growth. Council chair Monika Schnitzer said in a statement that the burden should be shared fairly across generations and social groups.

The warning adds to Germany’s debate over the future of its constitutional debt brake, which usually limits the federal government’s structural deficit to 0.35% of GDP. In early 2025, after Merz’s Christian Democratic Union won federal elections, Germany relaxed the rule to allow virtually unlimited borrowing for rearmament as security concerns in Europe intensified.

The council proposes gradually phasing out debt-financed defence spending by increasing the share covered by the regular budget. Under current rules, defence spending above 1% of GDP is exempt from the debt brake and can be financed through new borrowing, but the advisers recommend raising that threshold by 0.25 percentage points each year from 2031 so the government must finance more military outlays through taxes or cuts elsewhere.

Spending plans support growth but raise long-term risks

Merz’s coalition plans to spend up to €780bn on equipping the Bundeswehr in the five years to the end of 2030, while Germany also aims to meet Nato’s target of allocating 3.5% of GDP to core defence spending. The defence overhaul also includes a €500bn borrowing-funded vehicle for railways, communications networks and other ageing infrastructure over the next decade.

These measures mark a sharp break with Germany’s long-standing fiscal orthodoxy as Europe’s largest economy seeks to restore growth. The council estimates the spending surge will help lift economic growth to 1.3% this year and 1% in 2027 despite rising energy prices, while consumer price inflation is forecast at 2.8% in 2026 and 3.3% next year.

At the same time, the economists warn that rising interest expenses will widen financing gaps in the core budget and push Germany well beyond EU fiscal limits. Their proposed adjustment would amount to fiscal consolidation of 4.6% of GDP by 2040, which they say spreads the macroeconomic impact of the necessary tightening over a longer period.

As highlighted earlier, our coverage of Europe macro policy debates focused on balancing inflation control, debt dynamics and long-term investment.

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