Germany announced to take on up to EUR 1.5 trillion in new debt by 2035, breaking with the so-called “debt brake”, which was considered sacrosanct for years. In this article, we will explore the general mechanisms behind government debt & financing, how the money should be invested, and what potential implications on companies and consumers might be.
1. Why Is Everyone Talking About German Government Debt?
Just a few years ago, Germany’s so-called “debt brake” was considered untouchable. Introduced in 2009 and enshrined in the constitution, it was designed to ensure that federal and state governments did not take on new structural debt—signaling a commitment to fiscal discipline. The balanced budget became a political symbol.
But since 2022, this principle has begun to erode, ultimately leading to an unsolvable dispute within the former government that has resulted in the re-elections in February 2025. The German government has now introduced several special funds—one for defense, another for infrastructure and transformation. In total, up to €1.5 trillion in new debt is expected by 2035. This marks a historic shift in German fiscal policy—with far-reaching consequences for the state, the economy, and society.
2. What Is Government Debt—and How Does It Work?
Government finances work in principle like the finances of an individual company or household: the state has regular income—mainly from taxes—and ongoing expenditures such as social benefits, infrastructure, administration, and education. If expenses exceed revenues, a deficit arises.
To cover this gap, the government must borrow money—i.e., take on new debt. This is typically done through the issuance of government bonds purchased by investors like banks, insurers, or funds. In return, the state receives capital and agrees to repay it with interest.
The decisive metric is not just the absolute debt level, but the debt-to-GDP ratio—i.e., debt relative to economic output. Germany is in a relatively strong position compared to many industrialized countries, thanks to years of fiscal restraint.
| Country | Debt-to-GDP Ratio (2024)¹ | Avg. Interest Rate² |
| Germany | ~63.6% | ~2.75% |
| USA | ~125.0% | ~3.9% |
| France | ~109.5% | ~3.1% |
| Italy | ~140.6% | ~4.1% |
Germany’s solid credit rating enables it to borrow at relatively low cost—unlike countries like Italy, which face much higher risk premiums.
3. What Will the New Debt Be Used For?
According to the German government’s current plans:
- €500 billion will be invested in infrastructure, digitalization, energy, and transformation—including power grids, rail systems, EV charging infrastructure, hydrogen projects, building renovation, and climate-neutral industrial processes.
- €500 to €1,000 billion is earmarked for Germany’s defense capabilities—including modernization of the armed forces, procurement of new equipment, cybersecurity, and military infrastructure.
Additionally, funds are to be directed toward strategic future sectors such as semiconductor manufacturing, artificial intelligence, digital public services, education, and R&D.
The government has emphasized that these expenditures are not only ecologically but also economically sustainable—intended to secure long-term growth, jobs, and resilience. These investments are seen as responses to geopolitical shifts, demographic challenges, and the need to restore Germany’s technological competitiveness.
Much of this is to be financed outside the regular federal budget via special funds—effectively bypassing the constitutional debt brake.
This raises the question:
Where does prudent fiscal policy end—and where does risky debt accumulation begin?
4. Is Debt Good or Bad? – The Economic Perspective
Economists have long debated the role of public debt. The key question is whether debt is used for short-term stabilization or long-term prosperity.
According to the Golden Rule of Public Finance, debt is justifiable if used for investments that benefit future generations—e.g., infrastructure or education.
Economists distinguish between:
- Productive/investive expenditures: for infrastructure, R&D, clean energy, digitalization—projects that boost long-term growth. IMF, OECD, and DIW studies show that productive investments often yield multipliers >1, meaning €1 of spending generates more than €1 of GDP.
- Consumptive expenditures: e.g., for social transfers, subsidies, or routine administrative costs—expenditures that create no lasting economic return. These tend to have low or even negative multipliers, especially if they distort incentives.
If debt-financed spending increases a country’s economic output, future tax revenues can offset today’s interest burden—making it fiscally sustainable.
A helpful analogy: a household borrowing for a smartphone vs. investing in a small business. Only the latter creates the ability to repay the debt.
In practice, the line between investment and consumption is often blurred. Even social spending can stabilize demand in recessions. But the quality of spending remains decisive for debt sustainability.
5. The Key Question: Will the Money Be Used Wisely?
The debate is shifting—from debt levels to how funds are used and managed.
The danger: politically driven projects, inefficient structures, or vague “transformation” programs that fail to deliver economic returns.
The key questions to assess the effective use of Germany’s debt are:
- Is this really “future money”—targeting innovation, competitiveness, resilience?
- Or are we simply funding more bureaucracy, subsidies, and temporary fixes?
- Are structural reforms being neglected due to the abundance of money (e.g., digitalization of government, tax simplification, spending efficiency)?
To ensure that government debt is used productive/investive, the economic research institute ZEW proposes a “future quota” in their study “Zukunftshaushalt statt Schuldenbremse” (2025)3: a legally binding minimum share of public spending dedicated to growth-enhancing investment—like a protected budget line.
Economists like Daniel Stelter warn that expansionary fiscal policy without reform will merely cement inefficiencies. Debt used to mask problems today creates fewer options tomorrow.
The right question isn’t “How much debt?”—but “What for?” and “How effectively?”
6. Implications for Companies and Consumers
Public debt on this scale has tangible consequences for businesses and households alike.
For Businesses:
- Opportunities from public contracts: Construction, energy, tech, and defense industries may benefit directly from infrastructure and procurement programs.
- Risks from inflation and interest rates: If government demand meets capacity constraints (e.g., in construction), prices rise—fueling inflation. That, in turn, can lead to higher interest rates
- Working capital pressure: Higher interest rates, rising costs, and delayed public payments increase liquidity stress and require tighter cash management.
For Consumers:
- Higher cost of living: Especially in housing, energy, and transport. Real wages may lag behind.
- Rising borrowing costs: Mortgages, auto loans, consumer credit—all become more expensive in a high-interest environment.
- Future tax pressure: Even if no tax hikes are planned now, they may be needed in the future to ensure debt sustainability.
- Upside potential: If infrastructure is upgraded and services improve (schools, public transit, digital services), long-term quality of life may rise. But only if investments are well-executed.
7. Conclusion
Germany’s new debt strategy is a turning point. After years of fiscal restraint, the state is shifting to large-scale investment.
This could be a historic opportunity—if the funds are used productively. But execution is everything: without reform, efficiency, and transparency, even €1.5 trillion won’t move the needle.
Debt isn’t inherently bad. It can enable growth—if it’s linked to smart projects, good governance, and real returns.
Germany’s task in the 2020s: balance investment with reform, spending with effectiveness, and short-term stimuli with long-term sustainability.
Debt doesn’t fix problems on its own. But used wisely, it can help solve the right ones.
Sources:
1 Federal Ministry of Finance (BMF), Monthly Report February 2024, Debt Statistics: https://www.bundesfinanzministerium.de/Monatsberichte/Ausgabe/2024/02/Inhalte/Kapitel-6-Statistiken/6-1-19-staatsschuldenquoten.html
2 Interest data: OECD Economic Outlook 2024, section on sovereign financing costs
3 ZEW, Zukunftshaushalt statt Schuldenbreme (2025): https://ftp.zew.de/pub/zew-docs/div/Zukunftshaushalt_statt_Schuldenbremse_2025.pd