By Thomas Kolbe
The new German federal government is planning hundreds of billions of euros in new debt. With this, Germany joins the ranks of the heavily indebted states of the Eurozone. Officially, the funds are intended for military capability and infrastructure development. But what strategy is the government really pursuing? The coalition of CDU/CSU and SPD is prepared to burden German taxpayers with over one trillion euros in debt. That’s a steep price for a policy that continues the stagnation of the Merkel years: no economic reforms to promote the private sector, but instead a push for greater centralization.
Revolution in the Bond Market
Germany’s fiscal turnaround signals a small revolution in the bond market. Massive bond issuances are already driving interest rates upward. The announcement of the debt program caused yields on ten-year government bonds to surge by 40 basis points. The return of the bond vigilantes looms — those investors who critically scrutinize the debt positions of struggling debtors. For decades, German government bonds were synonymous with stability. But with public debt projected to rise from 63% to as much as 95% of GDP — barring a deeper recession — that image is starting to crumble.
A New Reserve Asset?
It was Bloomberg that revealed the secret: Until now, Germany’s relatively conservative debt policy made it an unlikely candidate for the role of a reserve asset — a product that banks and investors can use as collateral to secure liquidity and credit. In Europe, that role was ironically filled by Italy, which, with a debt-to-GDP ratio of 140%, offers a sizable bond market. Now, however, Bloomberg suggests German government bonds could become an alternative to the globally dominant system of U.S. Treasuries. The idea is enticing: a liquid market of euro-denominated securities offering investors a hedge while the U.S. pushes its own fiscal and monetary limits.
Investor Skepticism
But will international investors actually accept German government bonds as credit collateral? That’s highly doubtful, given the economic and fiscal troubles of the Eurozone. The urgency has grown since the U.S. Federal Reserve rapidly raised interest rates and shows no willingness to follow the swift easing course of its European, Japanese, and Chinese counterparts. Investors will carefully consider whether they can trust these new European securities amid the Ukraine crisis, energy problems in Europe, and the EU’s reluctance to embrace market-oriented reforms.
But behind the façade of fiscal responsibility, the Eurozone’s paper empire relies on fragile trust — and Germany is printing its way into the heart of it. The credibility of euro-denominated debt rests less on sound economics than on political cohesion and institutional promises. In such a system, any serious deviation — economic, geopolitical, or fiscal — could trigger a confidence shock with far-reaching consequences.
Europe in Global Competition
Germany’s rising debt is not an isolated event. It fits into a long history of European debt policy that relies on state intervention rather than reform. The tariffs introduced by U.S. president Donald Trump give the EU an excuse to further centralize political power and meddle in markets. Brussels dreams of grandeur while the coffers run dry — a prime example is the air taxi startup Volocopter, which, despite 150 million euros in subsidies from the federal government and Bavaria, filed for insolvency in December 2024 because neither the market nor investors believed in the vision. Yet these measures fall short of securing Europe’s competitiveness. Europe continues to lose direct investments to the U.S. — in 2023 alone, a net total of around 20 billion euros in investment capital flowed from Europe to North America. Jobs are being created there in the private sector, while Europe relies on state subsidies and believes the government can efficiently allocate capital.
Numbers and Reality
A look at the numbers reinforces the skepticism. While the U.S. benefits from its role as the world’s reserve currency and a dynamic economy despite high debt (over 120% of GDP), the Eurozone struggles with stagnation. Germany may create a larger bond market with its new debt, but it lacks credibility. Yields on ten-year US Treasuries currently stand at around 4%, while German bonds, despite a recent uptick, barely exceed 2%. For investors seeking safety and liquidity, the dollar remains more appealing — not least due to Europe’s geopolitical uncertainties.
The Looming Debt Mountain
This is how it will play out: German government bonds will only add to Europe’s debt mountain. Without far-reaching social reforms and a return to market-oriented policies, the EU faces significant socioeconomic tensions. The momentum cannot be underestimated once citizens realize their money is losing purchasing power faster than the EU can point to external culprits. The federal government hopes its debt programs will secure Germany a new role in the global financial system. But the reality is sobering: without fundamental reforms, Germany — and with it the Eurozone — will continue to lose ground. The bond vigilantes are watching, and markets don’t forgive illusions. German government bonds as an alternative to U.S. Treasuries? A bold hypothesis that, in practice, is likely to falter on Europe’s weaknesses.