analysis
Additional government debt should enable Germany to invest hundreds of billions in defense and infrastructure. This will have consequences that will also be felt in everyday life.
Germany should be able to invest enormously – in defense, in infrastructure. But what will the economic consequences of the enormous new debts be used to make it possible? After the Union and SPD's unification to a billion -dollar financial package and the loosening of the debt brake, the bond market has moved into the focus.
Immediately after the black and red plans became known, the return of the ten-year German federal bond rose by 20 basis points overnight. This is a lot on the pension market: developments here are usually more moderate than with stocks. The increase means that it becomes more expensive for Germany to finance its government debt.
For weeks, market observers have noticed a trend in this direction. “The returns of European government bonds are increasing, even out of concern for rising government debt for armaments,” says Arthur Brunner, bond expert at ICF Bank, in conversation with tagesschau.de. Because Germany is “piling up a giant debt and these debts have to be paid”.
Who could buy the new government bonds
Other countries are expected to follow up and also issue government bonds to invest in armaments projects. “This year the EU wants to start bonds for the joint defense of 150 billion euros,” said Brunner.
But who should buy these bonds? On the other side of the Atlantic, US bonds that investors bring more interest. In fact, the distance between US state bonds over ten years of term and the equally long-running federal bonds are currently 1.5 percentage points. “The US bond market remains attractive due to the strong dollar and the strong US economy,” says Brunner. “But buyers for European, especially German bonds, are always available.” According to his assessment, the sovereign funds such as Singapore, insurers or banks are. “However, it becomes more expensive for the debtors; you have to pay higher interest rates.”
According to the rating agency Scope, Germany will be able to keep its first -class credit assessment. Even if the new financial package increases the debt by 2029 to around 3.6 trillion euros or around 72 percent of the gross domestic product (GDP), the debt rate remains under its previous maximum of 80 percent, which was achieved in 2010 after the global financial crisis, Eiko Sievert, Scope-lead analyst for Germany, said Reuters.
On the way to 100 percent debt rate?
But does it really stay that way? Probably not, says Commerzbank chief economist Jörg Krämer. He sees Germany in ten years with a debt rate of 90 percent, “whereby this also depends on inflation and is therefore not easy to predict”.
Financial scientist Friedrich Heinemann from the Center for European Economic Research (ZEW) even believes: “Germany's debt rate could exceed the 100 percent mark in 2034.” Germany would “quickly join the EU university countries”. Germany is currently in debt with around 63 percent of its economic output – what is a moderate value in a European comparison.
Increasing building interest rates to be expected
As a consequence of higher returns for federal bonds, house builders have to expect rising interest rates. The construction interest is based on the yields of long -term bonds. If they continue, the construction or purchase of a property will also be more expensive.
Usually this would have the result that the upswing could be delayed in the construction industry. However, the construction industry is likely to benefit from the planned 500 billion euro special assets for the repair of the infrastructure. Felix Pakleppa, general manager in the Central Association of German Construction Management, sees the planned investments “urgently needed modernization offensive”. “We expect not only economic impulses, but also to strengthen our national competitiveness.” In the middle of the week, infrastructure shares such as Heidelberg Materials rose accordingly.
According to economists, one thing should not be forgotten: In the infrastructure, the special fund must be accompanied by an acceleration of the approval procedures. “Overall, it is about sending a credible signal to the private sector that the state is now serious about the investment offensive,” said Jens Südekum, the international economy at the Heinrich Heine University Düsseldorf. Conclusion: money alone is not enough.
Inflation risk also for private households
It is foreseeable that with the debt plans of the expected black and red coalition, another risk increases: inflation. Like Germany, many European countries are still above the goal of the central bank of two percent inflation.
“If a demand bloated by loans meets a burdened economy, then this is basically a risk of inflation,” explains Commerzbank chief economist Krämer in conversation with tagesschau.de. The economist gives an example: “Construction workers and craftsmen who are now increasingly renovating schools, daycare centers or swimming pools are missing for private projects.” The result is that craftsmen and construction workers become more expensive. “Due to debts you cannot remove the scarcity of resources.”
Positive effects for the economy
It should be clear that an increase in government spending on defense and infrastructure enlivens the economy as a whole. New jobs are created in this way – which could become all the more important as a possible trade conflict with the United States would be harmful to the economy. “An increase in defense expenditure to three percent means another 65 billion euros annually and creates or secures an additional 660,000 jobs in Europe,” says a study by the consulting company EY with the decabank. Increasing European defense spending would particularly benefit companies in the EU.
Many economists also point out that there are currently hardly any real alternatives to new debts. Because the necessary investments are so high that a hard austerity policy or new taxes alone would not be enough to procure the money. And both would slow down economic growth. “The additional defense spending against the background of the populist back in many countries can only be financed limited by savings elsewhere or tax increases,” says Gilles Moëc, chief economist of the AXA Group.
