Published in Newsroom.co.nz (Wellington), 16 June 2026
When the European Central Bank raised interest rates on June 11, its first increase since 2023, the news was unwelcome across the eurozone. It was especially unwelcome in Germany.
Across the currency union, growth is weakening while prices rise. Economists have dusted off a word last fashionable in the 1970s: stagflation.
At the start of the year, 2026 looked less alarming. Markets expected the Bank to sit still. Then the Iran war drove oil above $100 a barrel and eurozone inflation climbed to 3.2 percent.
European Central Bank President Christine Lagarde said the rates decision would make sense under several possible outcomes. She did not add how uncomfortable those outcomes are for Germany.
The Bank, of course, does not decide what Germany pays on its debt. Capital markets do, and they moved first. Ten-year German government bonds already yield more than 3 percent, their highest since 2011.
The wider shock had already forced Berlin to halve this year’s growth forecast to 0.5 percent. The Bundesbank expects inflation to be near 3 percent. Germany is close to recession, while inflation remains too high.
But Germany’s deeper problem is structural. By 2030, pension subsidies, defence and interest alone could absorb roughly two-thirds of federal spending, and almost all federal tax revenue.
None of these three can easily be cut. What remains must cover everything else the government does.
These figures are mostly drawn from the government’s own budget plans, not hostile estimates. The subsidy propping up the pension system rises from €128 billion this year to €154b by 2029, while the defence budget reaches €180b by 2030.
Interest completes the squeeze. The Institut der deutschen Wirtschaft, an economic think tank in Cologne, calculates that debt servicing consumed one tax euro in 13 last year. By 2030, it will be almost one in five.
You might expect a government borrowing almost a trillion euros over five years to invest it in infrastructure and defence. But on the institute’s unadjusted measure, the investment share of the core budget falls from 9.3 to 7.7 percent by 2030.
Meanwhile, Clemens Fuest, who heads Munich’s ifo economic research institute, has warned that much of the new borrowing is being used to plug budget holes rather than fund genuine investment.
How did the country that preached fiscal rectitude across the eurozone for decades end up here?
To understand that, go back to the decade when everything seemed to be working. In 2017, Wolfgang Schäuble, the stern face of German fiscal discipline, retired after eight years as finance minister. To farewell him, hundreds of his officials gathered in the ministry’s courtyard of honour and formed a giant human zero.
The schwarze Null, the black zero, became Schäuble’s creed: a federal budget without new debt, revered as doctrine.
Berlin did balance the federal books, and not just once: from 2014 to 2019, the federal government took on no new net debt for six years in a row. But the zero was cheap. In 2009, the federal budget paid about €38b in interest. A decade later, the figure was just under €12b, and by 2019 investors were paying Berlin for the privilege of holding its 30-year bonds.
Too little of the windfall went into what would have made Germany safer or more competitive. Rather than spending on military or infrastructure, it went towards expanding the welfare state.
In 2014, the pension fund was so flush that a contribution rate cut was legally due. The government cancelled the cut and spent the money instead, on retirement at 63 for long-serving workers and higher pensions for older mothers.
That package costs about €10b a year, one of the most expensive pension expansions in modern German history.
Later governments went further, promising that the standard pension level would not fall below 48 percent of average wages, no matter how fast the population ages. Last year, Chancellor Friedrich Merz’s coalition extended that promise to 2031 and again raised pensions for mothers.
Ironically, all of this happened while Berlin lectured southern Europe on fiscal responsibility. Chancellor Angela Merkel told the world to emulate the Swabian housewife, Germany’s symbol of household thrift, and Schäuble flirted with expelling Greece from the euro for its fiscal sins. Greek protesters responded by burning German flags and effigies of Merkel.
But while Germany scolded Athens over its published debts, it was quietly accumulating implicit liabilities on a scale no Maastricht debt figure captured: the pension promises of an ageing nation. Who would have thought that the Swabian housewife had debts of her own?
And yet none of this was hidden. For years, German economists had warned that this largesse would not end well, because the spending promises already on the books were becoming unsustainable. Continuing existing policies would be enough to break the budget.
That reckoning is now arriving. The cheap decade ends just as Berlin issues a record €512b of federal securities this year and as millions of baby boomers are retiring. It also follows six years of practically no growth in the German economy.
Twenty-seven years ago, in June 1999, The Economist called Germany the “sick man of the euro”. Gerhard Schröder, the Social Democrat chancellor (and not yet a lobbyist for Russian pipelines), answered with his Agenda 2010 welfare reforms. These reforms helped restore the country’s competitiveness and but ultimately cost him the chancellorship in 2005.
Berlin knows what a serious reform package would contain. However, everyone remembers what happened to Schröder, which is why no one volunteers to repeat his approach.
And it will not stay a German problem. The euro was built on the assumption of German solidity. The next crisis may find Europe’s anchor less steady than Europe assumes.
Germany’s finance minister is already struggling to plug billion-euro holes in the budget. Looking back from the 2030s, these times may be remembered as the good years.
