Friedrich Merz urged to curb German defence borrowing

{"text":[[{"start":8.04,"text":"Germany’s Council of Economic Experts has urged Chancellor Friedrich Merz to curb debt-financed defence spending before soaring interest costs put unprecedented pressure on the budget."}],[{"start":19.16,"text":"The five-member council said on Wednesday that Germany’s debt could reach 98 per cent of GDP by 2040 if the current pace of borrowing to fund rearmament continued. The ratio at present stands at 63 per cent, below the EU average of 82.9 per cent."}],[{"start":36.6,"text":"“Capping expenditure growth in the budget is unavoidable. Consolidation should be designed in a way that does not hinder growth, and the burden should be distributed fairly across generations and social groups,” council chair Monika Schnitzer said in a statement."}],[{"start":50.8,"text":"The warning will intensify a debate in Germany over the future of its constitutional debt brake, which normally limits the federal government’s structural deficit to 0.35 per cent of GDP."}],[{"start":62.2,"text":"In early 2025, shortly after Merz’s Christian Democratic Union won federal elections, Germany relaxed its debt brake to allow virtually unlimited borrowing for rearmament. The move came as US President Donald Trump signalled he wanted to scale back Washington’s security commitments to Europe amid an intensifying threat coming from Russia."}],[{"start":null,"text":"

"}],[{"start":83.4,"text":"A 15-member commission established by Merz’s coalition of Christian Democrats and Social Democrats has since failed to reach a common proposal to permanently reform the debt brake and how to bring defence spending back under a more flexible fiscal framework after 2029."}],[{"start":99.28,"text":"Merz’s coalition plans to spend up to €780bn on equipping the Bundeswehr in the five years to the end of 2030, as Germany seeks to meet Nato’s target of allocating 3.5 per cent of GDP to core defence spending."}],[{"start":114.2,"text":"The defence overhaul was accompanied by the creation of a €500bn fund financed through borrowing, to be spent over the next decade on the country’s ageing railways, communications networks and other infrastructure assets."}],[{"start":127.72,"text":"Together, the measures have overturned years of fiscal orthodoxy as Europe’s largest economy seeks to grow again."}],[{"start":134.52,"text":"The council, which provides independent advice to the government, estimates that the spending surge will help boost economic growth to 1.3 per cent this year and 1 per cent in 2027, despite rising energy prices. It forecasts consumer price inflation will reach 2.8 per cent in 2026 and 3.3 per cent next year."}],[{"start":156.84,"text":"But the economists warn that “rising interest expenses will widen the financing gaps in the core budget”, while Germany’s debt trajectory would put it far beyond the limits set by EU fiscal rules."}],[{"start":168.48,"text":"To contain the risk, they propose gradually phasing out debt-financed defence spending by increasing the share that must be covered by the regular budget."}],[{"start":177.62,"text":"Under the current rules, defence expenditure above 1 per cent of GDP is exempt from the debt brake and can be financed through new borrowing. The council recommends raising that threshold by 0.25 percentage points annually, from 2031, requiring the government to fund more military spending through taxes or cuts elsewhere."}],[{"start":197.14,"text":"This would imply a fiscal consolidation of 4.6 per cent of GDP by 2040. “Such a gradual adjustment spreads the macroeconomic impact of the necessary consolidation over a longer period,” the council said."}],[{"start":197.64,"text":"Additional reporting by Aysun Bora"}],[{"start":216.87,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1794449218_7906.mp3"}