German economic advisers urge Merz to curb debt-financed defense spending

Germany's Council of Economic Experts urged Chancellor Friedrich Merz on Wednesday to curb debt-financed defense spending. The advisers said soaring interest costs could put unprecedented pressure on the budget.

What happened

The five-member council said on Wednesday that Germany should limit the use of borrowing to pay for defense. Its concern is the cost of servicing public debt, which it expects to weigh heavily on the federal budget in the years ahead.

In the same publication, the advisers lifted their outlook for German growth in 2026. They also warned of risks from a widening budget deficit. The two messages came together: a brighter near-term picture for the economy, and a caution about the state of public finances.

Why it matters

The message arrives as the government relies on borrowing to finance a larger defense effort. The council is an independent advisory body, and its views carry weight in the debate on fiscal policy. Its warning shows that stronger growth does not remove the pressure on public finances.

The brighter outlook offers some relief for Merz and his finance minister. Faster growth can ease the budget picture, because it supports tax revenue. Even so, the advisers made clear that the deficit and interest costs remain the main risk. The government now faces a choice between defense needs and fiscal room.

Interest costs matter because they absorb money that would otherwise be available for other spending. When debt rises quickly, a larger share of each year's budget goes to payments on past borrowing. This is the dynamic the council describes when it speaks of unprecedented pressure.

For investors, the report is a reminder that German public debt, its financing costs and the pace of borrowing remain central factors in assessing the country's economic and fiscal outlook.

What to watch next

The next step is the government's response to the council's call for restraint. Attention will focus on how Merz and the finance minister balance defense financing with the budget and the interest burden the advisers describe.

The council's fuller analysis of growth and of the deficit risks will shape how the debate develops in Berlin. The question for policymakers is how to fund defense without letting debt service crowd out other priorities.