The debt trap: Why the interest rate turnaround is putting the German budget under pressure

It's a neat intellectual exercise: As long as the economy's growth rate is higher than the interest rate on government debt, there's no need to worry much about growing mountains of debt. Because under these conditions, the debt ratio falls little by little, even without a surplus in the budget. In the 2010s, which were characterized by a period of historic low interest rates, politicians, economists and journalists used this economic logic as a seemingly irrefutable argument for more debt. However, they were happy to forego the footnote that it is not a law of nature that the growth rate is greater than the interest rate - but a statement of probability.

An additional 60 billion euros

In autumn 2026, the low interest rate phase will be history. The German state pays just under 3.4 percent for ten-year federal bonds. And even if nominal economic growth is still a bit higher, mainly because of high inflation, interest costs become a millstone in the federal budget. The increase in yields since last year alone will cost taxpayers an additional almost 60 billion euros over the next five years. Interest costs are becoming the third largest item in the budget. Every third euro of spending will be financed by loans in 2027. The cost explosion will be correspondingly gigantic if interest rates continue to rise.

The truth is that in the 2010s, higher debt would actually have been justified for future investments in education and infrastructure. Ideally, they would have catapulted the economy onto a higher growth path. Today, these investments not only come too late, they are also significantly more expensive due to higher prices and borrowing costs.

In addition, the debt also finances pension and social spending, which flows into today's consumption and not into tomorrow's productivity. Without spending cuts, Germany will march into a debt trap that will permanently eliminate any leeway in the budget. In times when the AfD promises people the best of luck and the state should be efficient and capable of acting, this is like declaring bankruptcy.