Economic Struggles and Persistent Standstill in the European Union and Germany
In a significant move, Chancellor Merz's government in Germany has announced a shift in fiscal policy, aiming to boost public expenditure and finance a heavier budget deficit through new public debt, rather than through taxation. This change is largely due to a constitutional amendment that relaxed the debt brake, allowing unlimited defense spending beyond 1% of GDP and establishing a €500 billion special fund for infrastructure and climate neutrality investment, valid for 12 years.
This expansionary fiscal policy is expected to mark a paradigm shift, with net borrowing rising from €50 billion in 2024 to €143 billion in 2025, and further increases planned for 2026. This could lead to record investments of €115 billion in 2025 across the core budget, climate funds, and the special fund.
However, the picture could change drastically if Berlin continues to perform poorly in both economics and politics, and markets begin to view Germany as part of the European problem, rather than the solution. This could deepen the EU's fiscal predicament.
Meanwhile, the growth in M2 and M3 (measures of money supply that include various types of deposits and securities) during the April 2024 to March 2025 period was about 4.0 percent and 3.7 percent, respectively.
Another potential concern is a new, more aggressive round of interest rate manipulation by the European Central Bank (ECB), which could potentially trigger a European crisis. However, with nominal and real interest rates on the 10-year Bund at about 2.6 percent and 0.5 percent, respectively, and the average maturity of that debt being relatively long (7.6 years), the ECB would be under no major pressure to further manipulate interest rates and ease the refinancing of short-term debt.
As Europeans gradually become aware, hostility toward big business and the hasty transition toward renewable energy have stifled innovation, entrepreneurship, and access to relatively cheap power. To mitigate this, the German government could try to take advantage of the very low interest rates characterizing its current short-term debt and finance public expenditure by issuing new bonds with a limited maturity of two to three years.
This shift in German fiscal policy, while aiming to stimulate growth and investment, comes with its own set of challenges and potential risks. It remains to be seen how these developments will unfold in the coming years and their impact on the European economy as a whole.
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