Under the title “Finance. Research. Finger Food.,” a new event series was launched on 9 April 2025, to promote dialog between top economic research and political decision-makers in Berlin. The initiative is a collaboration between the German Institute for Economic Research (DIW Berlin), the Halle Institute for Economic Research (IWH), and SAFE. The launch event was especially timely: just hours after the announcement of the coalition agreement between the CDU/CSU and SPD, three economists discussed the possible consequences of the planned Sondervermögen, two special funds for infrastructure and defense spending, and the partial suspension of the debt brake.
German government debt is not an increased risk
Florian Heider, Scientific Director of the Leibniz Institute for Financial Research SAFE, opened the event by analyzing capital market reactions to the special fund. Following its announcement, yields on German government bonds had risen by 50 basis points. Some observers interpreted this as a sign of increased default risk for the German government and warned of rising public debt. However, Heider offered a more nuanced view: “The yield spread between German bonds and those of other eurozone countries—like Italy—has not changed. A change of this sort would have been expected if only Germany’s risk had increased. German government bonds continue to be seen as safe assets—low-risk investments for which investors are willing to pay a premium.” Especially in times of crisis - most recently when President Trump announced punitive tariffs in the US - capital tends to flow into German bonds. From this perspective, Heider argued, it makes economic sense to expand the supply of these securities and thus meet market demand. More on this topic can be found on the SAFE Finance Blog.
Special funds are not a path to high inflation
Alexander Kriwoluzky, Head of the Macroeconomics Department at DIW Berlin, followed with an analysis of the potential inflationary effects of an increase in government borrowing. Here, too, the public debate is dominated by concerns over rising inflation. But economic analysis offers reassurance—for two reasons: First, inflation expectations in financial markets changed only moderately after the announcement. Second, even in a negative scenario - in which northern European countries take on debt amounting to 1.5 percent of their GDP - a model-based simulation predicts an inflation rate of less than six percent. While certain price level effects from increased government spending are undeniable, a sustained inflation rate above the ECB’s target is not to be expected.
Structural problems prevent public investments
With these two common concerns about higher public borrowing addressed, Reint Gropp, President of the IWH, turned to the structural conditions for public investment. His assessment was sobering: It is not the debt brake, introduced in 2009, that has prevented higher public investment in the past. Rather, public investment levels in Germany have consistently stayed below the EU average for the past three decades. The root cause lies in the complex responsibilities of Germany’s federal system and in administrative, construction, and environmental regulations. Municipalities in particular are often unable to access the federal funds provided for investments – in infrastructure, for example – since they face severe capacity constraints in terms of personnel and own finances. As long as these structural barriers remain in place, there is a risk that resources from special funds will not be used for investment, but rather for consumption—or may not be accessed at all.
The Finance. Research. Finger Food. series will be held twice a year going forward. The next event is planned for fall 2025 and will once again take place at DIW Berlin. For inquiries, please contact Christiane Zschech at events@diw.de.
