Germany: 2025 Draft Budget Tests Debt-brake Flexibilities to Partially Address
Sufficient Fiscal Space to Tackle Structural Challenges
Germany retains comfortable fiscal space, as highlighted by its safe-haven status, excellent funding conditions and gradual downward trend in the general government debt ratio to below the 60%-Maastricht threshold by 2028 (Figure 2). Annual general government deficits will average around 1.1% until 2028.
Longer term, the main credit challenges for Germany include its ageing and declining working-age population, as well as balancing the energy transition while maintaining its international competitiveness. Higher investment spending would thus help increase the economy’s growth potential and is necessary to meet long-term demographic and environmental challenges.
Continued delays in addressing these structural challenges will contribute to Germany’s stagnating productivity, which remains only marginally above 2008 levels. This will also hold back near-term and potential economic growth, which Scope Ratings estimates at 0.8% per year, which also curbs growth across other EU countries as Germany is the top destination for merchandise exports for 15 of 27 EU member states, including for Czechia (33% of exports), Austria (29%) and Poland (28%).
Low public net investment will thus continue to be a problem for Germany’s economic outlook, but also the EU’s, which is unlikely to be resolved without constitutional reform, particularly since the Constitutional Court ruling from November 2023 restricted the use of emergency borrowing spread over multiple years.
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Julian Zimmermann is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Eiko Sievert, Senior Director and Primary Sovereign Analyst for Germany at Scope, and Elena Klare, Associate Analyst at Scope, contributed to writing this article.
This article was originally published by a www.fxempire.com
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