Germany’s Fiscal Policy Shift Has Global Consequences
In a historic shift, the German government has announced a special fund of 500 billion euros, a move that has sent shockwaves through the financial markets. The fund’s purpose is to modernize infrastructure, boost defense capabilities and support the economy.
However, this move has significant implications, as it marks the largest debt offensive since reunification. The immediate consequences are already being felt, with German bonds, once considered a symbol of stability, experiencing a sharp decline in value, reminiscent of the Euro crisis or the 2008 financial panic.
Before this announcement, ten-year German bonds were considered so secure that investors were willing to accept low returns. Those days are now over, as bond yields surge and prices plummet. This development is not isolated, as bond markets from Tokyo to New York are reacting to the sudden increase in German debt with a significant loss of trust.
When Germany, previously considered a model of fiscal discipline, abandons its debt brake, it sends a toxic signal to the global economy, already fragile due to geopolitical uncertainty, inflation concerns and growing investment needs.
The CDU’s sudden change in stance is particularly noteworthy, as the party’s leader, Friedrich Merz, was once a champion of sound state finances. His party, which long advocated against the erosion of the debt brake, is now embracing a historic increase in debt.
The justification for this move is the need for a geopolitical response, but this argument is only partially convincing, as it amounts to classic client politics. The SPD is getting its social-ecological transformation, the CDU is getting its military buildup and subsidies and the bill will be paid by future generations and bond investors, who have already understood the implications.
The loss of trust in Germany’s debt has far-reaching consequences, as German bonds are a global reference point. Pension funds, central banks and institutional investors worldwide hold them in their portfolios and are now losing confidence in a previously unshakeable credit rating.
The repercussions will be felt globally, as higher interest rates for German bonds mean higher costs for mortgages and corporate loans in Germany and even the refinancing costs in the Eurozone and beyond could be under pressure if Germany abandons its role as a stability anchor.