Relying on debt-funded military spending would weaken the credit outlooks of France and the UK, but the combination of limited fiscal flexibility and higher bond yields could encourage both governments to make the necessary budgetary adjustments. In addition, Germany’s fiscal stimulus could have favourable broader spillover effects on growth, which would help soften the permanent impact of increased European defence expenditure on public debt ratios.
Germany will rely predominantly on higher debt issuance to offset the decades of under-investment in its armed forces as the incoming administration secured a required two-thirds parliamentary majority to reform the constitutional debt brake. Robust public finances, anchored by a government debt-to-GDP ratio of 63% and a budget deficit of 2.0% of GDP in 2024, provide sufficient flexibility to finance large fiscal stimulus without significant tax hikes or spending cuts in other areas.
The UK is likely to finance higher…
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