New Financial Package by Union and SPD: Inflation Fears Resurface

A recent financial initiative introduced by the Union and SPD has gained traction in the Bundestag, successfully securing the necessary two-thirds majority. This package opens the door for new borrowing, raising concerns among experts about the potential rise in interest rates, which could escalate the cost of this debt.

On March 18, the financial proposal received approval after the Union and SPD reached an agreement with the Greens on its specifics. This paves the way for significant new debt accumulation, potentially reaching nearly one trillion euros during the upcoming legislative term alone. Projections indicate that total debt could rise to approximately 3.6 trillion euros by 2029, accounting for about 72% of Germany's GDP.

Despite this sizable increase in debt, many analysts contend that Germany can manage it effectively. Currently, the country's debt-to-GDP ratio stands at around 63%, which is relatively low in an international context compared to the European average of 90% and the United States at 124%. Even after the financial crisis of 2008, when the ratio peaked at 80%, the current figures still suggest manageable debt levels.

Experts emphasize that while borrowing may be feasible, the implications of rising interest rates are unavoidable. Interest rates are expected to increase, directly affecting the cost of government debt. Capital market strategist Harald Preißler from Bantleon notes that the end of the European Central Bank's interest rate reduction cycle is imminent. Consequently, interest rates could see a rise, with expected yields on government bonds ranging between 2% and 3% in the coming years.

Furthermore, rising inflation is another looming concern. Analysts warn that the financial package, combined with an economic recovery following two challenging years, is likely to contribute to inflationary pressures. OECD experts also highlighted the necessity for structural fiscal reforms to ensure the sustainability of debt repayment in the future, particularly as public spending on pensions and healthcare is anticipated to increase significantly.

With the Bundestag's approval, the Union and SPD have taken steps to relax the debt brake and establish a special fund. However, these changes require further legislative consent from the Bundesrat. The upcoming vote is crucial, and CDU leader Friedrich Merz has expressed optimism about its outcome.

The financial package also facilitates increased defense spending, allowing for investments exceeding 1% of GDP, which will in turn enable further borrowing. Under pressure from the Greens, the definition of defense now extends to include cybersecurity and civil protection efforts, as well as support for nations facing unlawful aggression, thereby permitting financing for aid to Ukraine through state borrowing.

Additionally, the proposal outlines the creation of a special fund for infrastructure, totaling 500 billion euros, with allocations for climate protection and direct support to states.