Germany's economy is doing better than its own advisers expected six months ago. That is the good news. The rest of the annual report that the German Council of Economic Experts presented in Berlin on 11 November reads like a warning letter to the government.
The council, the five-member body that advises the federal government and is known at home as the "Wirtschaftsweisen", raised its growth forecast for 2026 to 1.3%, from 0.5% in May. For 2027 it now expects 1.0%, up from 0.8%. Two things are doing the lifting: exports that came in unexpectedly strong, mostly to other EU countries, and government spending financed by borrowing.
The second of those drivers is the problem. Berlin is paying for its rearmament largely with debt, using the exemption for defence spending in its constitutional debt brake. The federal finance plan has net borrowing rising every year to 2030. Interest costs are rising with it.
The council ran the numbers out to 2040. If nothing changes, Germany's debt ratio under the EU's Maastricht definition climbs to around 98% of GDP, and the core federal budget faces a gap of roughly 2.7% of GDP. Bringing debt down faster makes the hole in the budget bigger, not smaller: phasing the defence exemption out by 0.5 percentage points a year from 2031 caps the debt ratio at 77.6%, but pushes the gap to 4.8% of GDP. A slower phase-out of 0.25 points a year lands at an 87% debt ratio and a 4.6% gap.
Inflation is also moving the wrong way. The council expects prices to rise 2.8% this year and 3.3% in 2027, driven largely by high energy costs.
The economists call the consolidation task one of "historic" scale and say decisions on how to pay for defence must be taken in this legislative period. Their menu is long: cut subsidies, reform the social insurance and transfer systems, make the tax system more efficient, and reverse the recent expansion of the "Mütterrente" pension top-up for mothers. For long-term care insurance they propose capital-funded savings by age cohort and tighter access to benefits. Achim Truger, one of the five members, recorded a dissenting view on the care proposals.
Even that package, worth about 2.2% of GDP by the council's own estimate, does not close the gap. Hence the line that will worry the coalition most: higher VAT and income taxes "could become necessary in the medium term".
"Politics will not get around hard decisions," said Monika Schnitzer, the council's chair. Chancellor Friedrich Merz chose the brighter half of the report, saying the German economy was "slowly picking up again".
Germany is the eurozone's largest economy and the loudest voice for fiscal discipline at EU level. Its own advisers now say its defence build-up will push national debt well above the 60% Maastricht reference value unless Berlin raises taxes or cuts deep into social spending. That sits awkwardly with Germany's position in the talks on the EU's next long-term budget, where Berlin has pushed back on bigger national contributions and on new common borrowing.
The export story matters too. Much of this year's upgrade rests on demand from the rest of the EU. A German recovery that runs through the single market is good news for its neighbours, but it also means German growth depends on European demand holding up while energy prices stay high.
Germany's growth upgrade is real but borrowed. The council's message is that the bill for rearmament has not been paid, only deferred, and that the choices Berlin makes on pensions, subsidies and taxes in the next two years will decide whether its debt stays close to EU norms or drifts toward 100% of GDP. For the rest of Europe, that matters well beyond Germany's borders: a Berlin that is squeezed at home will be a harder negotiator on every euro of common EU spending, from Ukraine to defence to the 2028-2034 budget.
