The German parliament has approved a substantial increase in borrowing to support infrastructure and security investments while relaxing borrowing limits. Over the next decade, Germany plans to spend between €900 billion and €1 trillion, which represents over 20% of its GDP.
Fitch Ratings estimates that the fiscal deficit may rise to between 4% and 4.5% of GDP by 2027, compared to 2.6% in 2023, resulting in debt levels approaching 70% of GDP, the highest among countries with AAA ratings. Long-term pressure on Germany’s AAA credit rating may arise if the increased spending is not balanced by measures to consolidate finances or fails to enhance economic growth.
Shift In Fiscal Policy
Germany’s decision to increase borrowing marks a broad shift in its approach to fiscal policy. Decades of budgetary restraint are giving way to more aggressive spending, primarily directed at infrastructure and defence. The sheer scale of this commitment—exceeding €900 billion over ten years—signals a willingness to prioritise economic expansion and national security over rigid fiscal discipline.
Fitch Ratings has outlined the fiscal implications of this shift. A fiscal deficit climbing to as high as 4.5% of GDP by 2027 could push government debt levels towards 70% of GDP. That would place Germany at the top among AAA-rated economies in terms of debt burden. If this trajectory continues without corresponding steps to strengthen economic performance or reduce deficits through future adjustments, the risk to its coveted credit rating will increase.
Investors need to assess the immediate effects of these policies on bond markets. Increased debt issuance from Germany will expand the supply of government securities, placing upward pressure on yields. Borrowing costs may rise as markets digest the higher expected debt load. Those involved in fixed-income markets will need to determine whether the increased yield compensates for the greater fiscal risk.
Currency markets are also likely to respond to these developments. If investors question whether the increased spending will translate into faster economic growth, confidence in the euro could waver. The balance between growth expectations and concerns over long-term fiscal stability will influence exchange rate movements in the weeks ahead.
Market And Credit Rating Implications
Long-term government borrowing costs in Germany have remained relatively low compared to historical levels. However, this financing strategy depends on investor confidence. Shifts in sovereign credit risk perception can alter funding conditions quickly. For those navigating interest rate exposures, volatility could increase as markets reassess the risk profile of German debt.
Germany’s move to prioritise spending over adherence to previous debt constraints may set a precedent for other European nations. If similar borrowing strategies gain traction elsewhere, broader market trends could emerge, affecting rates and risk premia across the region.
The response from ratings agencies will be crucial in determining how borrowing costs adjust. Should concerns over sustainability intensify, a broader repricing of German assets could follow. Market participants will need to stay alert to forthcoming official assessments.
All of this reflects a major transition in fiscal strategy—and one that financial markets will be forced to digest in real time.
