Berlin (AFP) – Germany must rein in a massive borrowing binge that is financing an overhaul of the military; otherwise, it risks a surge in its debt levels, a group of economists warned Wednesday. The top EU economy is pouring huge sums into bolstering its long-neglected armed forces to face a hostile Russia and with concerns about waning US security commitments to Europe.
Most defence spending has been exempted from the so-called “debt brake” in the German constitution, which limits how much the government can borrow. This means the majority of debt taken on to finance rearmament falls outside the regular budget. However, the council of economic experts, an independent body that advises the government, warned that this military spending spree would burden the budget in the coming years.
“Above all, it is defence spending that is rising sharply and is financed by borrowing,” council member Achim Truger said. “From an economic point of view, it’s simply not rational to finance defence spending of this scale permanently through debt.” While other factors, such as expansion of welfare spending, were weighing on public finances, defence was playing a major role, the experts warned in their annual report.
Defence spending in Germany is set to rise sharply, to around 110 billion euros ($122 billion) in 2027, with a significant portion of it financed through borrowing. Without action to rein in spending, the economists warned that Germany’s debt-to-GDP ratio could rise to as much as 98 percent by 2040, from around 64 percent currently. Such a surge would put traditionally frugal Germany above the current eurozone average.
The economists urged Germany to partially reverse the reform that allows most defence spending to be exempted from the “debt brake,” the constitutional rule that limits most federal borrowing to 0.35 percent of GDP. From 2031, the government should begin raising the amount of defence spending that has to be financed through the regular budget, they argued. Supporters argue this is necessary to put public finances on a more sustainable footing, although some worry it could necessitate painful tax rises or spending cuts.
Truger insisted that the economists were calling for a “gradual” roll-back of the exemption: “If you spread it out in the way we propose, I believe it is manageable.” The council also raised its growth forecast for this year to 1.3 percent, in line with the government’s own projection, saying the economy was being supported by strong exports and government spending. It also predicted growth of one percent for next year.
Chancellor Friedrich Merz, who has been under pressure to boost the economy after several years of stagnation, welcomed the “good news” but also stressed the government was focused on reining in spending. “You are calling on the government to pursue a sound budgetary policy and to focus on stable public finances — we share this assessment,” he said.
© 2024 AFP
