Prof. Dr. Jan Viebig, Global Co-CIO ODDO BHF Asset Management.
“Based on recently released corporate financial reports, we seen no reason to worry about widespread debt, and default rates remain moderate”
European government bonds experience unusual volatility at the start of the year. Over the past 12 months, the yield on 10-year German Bunds fluctuated within a range of 2.08% to 2.66%. The past week saw a sharp surge, however, with the 10-year yield jumping from 2.38% on 28 February to 2.93% on 12 March.
Following snap elections on 23 February 2025, the CDU and CSU entered exploratory talks with the SPD, resulting at short notice in the announcement of a public spending programme that includes a EUR 500 billion special fund for infrastructure and an increased defence budget. This plan would require a suspension of Germany’s debt brake for all military spending above 1% of GDP. Increasing the defence budget to 3.5% of GDP would translate to an additional EUR 110 billion in government borrowing per year. Friedrich Heinemann, an economist at the Centre for European Economic Research (ZEW) in Mannheim, estimates that Germany’s public debt could exceed 100% of GDP by 2034.
At time of writing, on 14 March 2025, whether this spending package will be implemented as proposed by the negotiators of the three parties remains uncertain. The main hurdle is that the debt brake has been enshrined in Germany’s constitution since 2011. To bypass this rule, the CDU and SPD need a two-thirds majority in the Bundestag, which they can only achieve in the outgoing parliament with support from the Greens and the FDP. In the newly elected Bundestag, the CDU, SPD, and Greens will control only 65.5% of the seats. However, as of 14 March, neither the Greens nor the FDP have committed to supporting the proposed constitutional amendment. Additionally, both the AfD and Die Linke have filed lawsuits with the Federal Constitutional Court, questioning – for different reasons – the legality of this attempt to secure a parliamentary vote on the debt brake before the new parliament convenes for its first session.
Constitutional issues aside, the CDU and CSU are also facing backlash from their voter base over plans to increase government debt, in contradiction to CDU leader Friedrich Merz’s pledge during the campaign. If coalition negotiators proceed with the planned spending package, it is unclear whether the next government will be able to obtain the required two-thirds majority in the Bundestag.
