Germany plans to significantly reduce its federal debt sales by 13% in 2025, aiming for €380 billion ($400 billion) in securities sales compared to €438.5 billion this year. This decision comes as the country grapples with a struggling economy and mounting pressure to support Ukraine’s defense against Russia. The announcement was made on Tuesday by the federal finance agency, signaling a shift in fiscal strategy amidst political transition.
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Reduced Borrowing Amidst Political Uncertainty
The German government’s plan to reduce borrowing comes as the country prepares for early elections in February following the collapse of Chancellor Olaf Scholz’s coalition government. The planned €380 billion in debt sales comprises €240 billion from the capital market and €126 billion from the money market. Notably, the plan incorporates Green Federal securities worth €13 billion to €15 billion, reflecting Germany’s commitment to sustainable finance.
Following the announcement, German 10-year bond yields dipped three basis points to 2.22%, indicating a positive market response to the reduced borrowing plan. However, with a new administration on the horizon, the issuance plan remains subject to revisions after the February elections and the subsequent adoption of the 2025 budget. Until then, government spending will be confined to essential expenditures and previously approved projects.
Interim Leadership and Budgetary Constraints
The recent political upheaval saw Jörg Kukies assume the role of finance minister after the dismissal of Christian Lindner in November. The failure of the ruling coalition to agree on a 2025 budget led to this change in leadership. Finance ministry officials anticipate that a regular budget will not be established until the latter half of 2025, given the potential for protracted negotiations to form a new governing coalition.
Economic Challenges and Political Fragmentation
Germany’s economic performance has been lackluster for several years, with Bloomberg Economics estimating the economy to be 5% smaller than its projected trajectory had the pre-pandemic growth trend persisted. This economic stagnation is largely attributed to structural issues, posing significant challenges for recovery. Growing concerns about declining living standards have fueled political fragmentation within Germany, evidenced by the rising support for fringe parties. The far-right Alternative for Germany currently holds the second position in polls, surpassing Scholz’s Social Democrats. This political landscape further complicates the economic outlook and adds uncertainty to future fiscal policies.
Conclusion: Navigating Economic and Political Headwinds
Germany’s decision to reduce debt sales reflects a cautious fiscal approach in the face of economic sluggishness and political uncertainty. While the move has been met favorably by the bond market, the long-term fiscal trajectory will depend heavily on the outcome of the upcoming elections and the policies of the new government. The country faces the dual challenge of revitalizing its economy and addressing the rising tide of political fragmentation. The 2025 budget will be a crucial indicator of the new government’s economic priorities and its approach to navigating these complex challenges.
