Fitch Ratings has warned that Germany’s ‘AAA’ credit rating could face long-term pressure if its significant increases in military and infrastructure spending are not counterbalanced by fiscal consolidation or sustained economic growth.
The rating agency released a report, titled German Spending Plans Show Willingness to Use Fiscal Space for Geopolitical, Growth Challenges, after the country unveiled plans for a major fiscal shift to address geopolitical and economic challenges.
Germany’s governing coalition, led by the Christian Democratic Union and its Bavarian sister party the Christian Social Union and the Social Democratic Party, has proposed substantial revisions to the country’s fiscal framework, including a €500-billion infrastructure fund and increased defense spending.
“We anticipate €900 billion to €1 trillion (21-23% of 2024 GDP) of additional government expenditure over the next decade,” said Fitch.
The fiscal deficit is projected to rise to 4-4.5% of GDP by 2027, up from 2.6% in 2024, while the debt-to-GDP ratio could climb to 70% — the highest among Germany’s ‘AAA’-rated peers.
Fitch noted that while Germany’s robust economy and eurozone benchmark status enhance its debt-carrying capacity, maintaining fiscal sustainability will be critical.
It also estimated the spending will boost annual GDP growth by an average of 0.4 percentage points in 2025-2027. However, this may not be enough to offset pressures, especially with growth forecasts for 2025 remaining weak at just 0.1%, partly due to the impact of higher US tariffs.
Germany’s focus on defense and infrastructure spending marks a departure from its traditional fiscal conservatism, a key anchor of its top-tier credit rating.
“The extent of broader economic reforms in the coalition plan and the future shape of the domestic debt-brake rule, which the coalition plans to reform more fully by end-2025, will be indicators of the relative importance given to strong fiscal metrics,” read the report.
Structural challenges, including competition from China, high energy and labor costs, and bureaucratic inefficiencies, continue to weigh on Germany’s economic prospects.
While the increased spending aims to address these issues and strengthen the country’s competitiveness, Fitch noted that meaningful progress would require broader economic reforms.
Germany’s spending plans are expected to have ripple effects across western Europe, providing some economic support amid US tariff pressures. However, higher borrowing costs could result for other eurozone countries as German bond yields rise in anticipation of stronger growth in Europe’s largest economy.