The regime change
In March 2025 Germany did something it had refused to do for fifteen years: it amended the Basic Law to loosen the debt brake. Defence spending above 1 percent of GDP was exempted from the borrowing limit, a €500 billion extra-budgetary infrastructure fund was created outside it, and the Laender were permitted to run small structural deficits. The constitutional anchor of German fiscal orthodoxy was, in effect, lifted. For a country whose entire post-reunification identity was built on the balanced budget, the schwarze Null, this was a genuine regime change - and it is the single most important macro development in Europe this decade.
Can Germany afford it?
The answer is unambiguously yes, and this is what distinguishes Germany from every other large fiscal expansion in the developed world. Germany entered this programme with a debt-to-GDP ratio in the low 60s - roughly half of France's and a third of Italy's or Japan's - and an AAA rating affirmed with a stable outlook by every major agency. A deficit of 3.5 percent of GDP, deployed against a debt ratio this low and at a cost of capital this credible, is not a sustainability risk; it is the responsible use of balance-sheet space that was deliberately preserved for exactly such a moment. The market verdict confirms it: Bund spreads to swaps remain tight, demand at auctions is firm, and the rating is untouched.
The debate about German fiscal sustainability is the wrong debate. Germany has the cleanest sovereign balance sheet in the G7 and is using a fraction of its capacity. The right debate is about the quality and composition of the spend - whether it raises the economy's productive potential or simply circulates through it.
The composition problem
Which brings us to the real risk, captured by the ifo Institute's finding that 95 percent of the new borrowing earmarked for 2025 was used to plug holes in the regular budget rather than to add net investment. If that pattern persists, Germany will have taken on debt without raising its capital stock or its productive capacity - the worst of both worlds, because the debt is permanent while the growth dividend is absent. Fiscal sustainability in the narrow sense is not the issue; fiscal effectiveness is. A 3.5 percent deficit that funds genuine investment in the grid, digital networks and defence capability pays for itself through higher trend growth. The same deficit funding current consumption leaves only the liability.
| Metric | Germany | Read |
|---|---|---|
| Debt / GDP | ~63% | Lowest large euro sovereign |
| 2026 deficit | 3.5% | Rising but from a strong base |
| Sovereign rating | AAA stable | Unanimous, top tier |
| Borrowing cost | 10Y ~2.93% | Cheapest euro benchmark |
| Spend quality | Contested | ifo: 95% plugged gaps in 2025 |
The medium-term trajectory
On current plans the deficit stays elevated for several years as the infrastructure fund disburses and defence spending climbs toward the NATO 3.5 percent target, pushing the debt ratio up from the low 60s toward the high 60s by the end of the decade. That is a meaningful increase, but it leaves Germany still below the euro-area average and far below its stressed peers. The trajectory is sustainable provided two conditions hold: that the spending lifts trend growth enough to stabilise the ratio, and that the political consensus behind the programme survives. The first is an economic question this desk judges finely balanced; the second is a political question that is becoming harder to answer as the AfD rises.
For allocators the conclusion is that German sovereign credit is not where the risk lives. The Bund remains the euro area's risk-free anchor and will stay AAA through this programme. The risk lives in the real economy - whether the spend works - and in politics - whether it continues. Those are the variables to monitor, not the debt ratio.