Germany Is Borrowing Big and Betting It Will Work
Germany's parliament passed its 2026 budget with more than €180 billion ($208 billion) in new debt, a level surpassed only during the pandemic in 2021. The borrowing is made possible by two structural changes: a special €500 billion infrastructure fund and a new exemption allowing unlimited defence spending above 1% of GDP outside the country's traditional debt brake rules.
The defence budget alone stands at €83 billion for 2026, a 32% jump from 2025 and the largest single year military spending increase in modern German history. Chancellor Friedrich Merz has pledged to build the strongest conventional army in Europe. Total government spending reaches €524.5 billion, up 10% from 2025 and 55% above 2024's level. Goldman Sachs forecasts Germany's economy will grow 1.1% in 2026, ending six years of stagnation, with about half that growth driven directly by this fiscal expansion.
The risk is real. Germany's debt to GDP ratio is heading toward 65.2% in 2026 and 80.25% by 2029. Critics, including the Ifo Institute, argue that much of what the government is calling investment is actually consumption spending in disguise, including subsidies, pension increases, and VAT cuts on restaurant meals. The Federation of German Security and Defence Industries has nearly doubled its membership since late 2024, from 243 to 440 companies, as manufacturers across automotive, machinery, and aerospace pivot to military contracts. Whether this translates into lasting economic growth or simply a burst of deficit funded activity is the central question hanging over Europe's largest economy.
Key Figures: • Germany 2026 new debt: more than €180 billion • Defence budget 2026: €83 billion, a 32% rise from 2025 • Total government spending: €524.5 billion • Germany GDP growth forecast: 1.1%
