Investing.com — Germany faces difficulties in financing more defense spending to meet NATO’s 2% of GDP target, with some advocating for higher spending (up to 4% of GDP), according to analysts at Commerzbank (ETR:).

While historically common (1960s) and adopted by some countries (eg, Poland), the current economic situation in Germany presents obstacles.

Germany’s slow economic growth is a significant obstacle. The country is projected to grow at an average rate of only 0.5% per year in the coming years, well below the level needed to accommodate a large increase in defense spending without impacting other sectors. sector.

Historically, faster economic growth has allowed Germany and other countries to manage high defense spending more effectively, because an increase in GDP naturally increases government revenue.

Without accelerating economic growth, Germany would need two decades to gradually increase defense spending to 4% of GDP, a politically and strategically impractical timeline, Commerzbank added.

Reduced spending in other parts of the federal budget offers a partial solution, but the scope for such savings is limited.

To close the gap through budget cuts alone, Germany would have to reduce federal civilian spending by nearly 20% over four years.

The potential savings from cutting social spending and improving government efficiency are not enough to fully fund increased defense spending.

While reallocating funds from climate initiatives, such as through more efficient carbon pricing, would generate savings, it would likely face significant political opposition.

Financing the defense increase through debt is another option, but it raises legal and economic concerns. Such an approach would almost double Germany’s budget deficit from 2% to 4% of GDP, violating European debt rules and the constitutional debt brake.

The current reliance on shadow funds to finance core state tasks such as defense is unsustainable in the long term, emphasizing the need for these expenses to be included in the regular budget.

Germany’s rising risk premium on government bonds further complicates debt-based financing. As stated by Commerzbank, the weak economic growth has already led to a noticeable increase in the cost of funding for government bonds.

To ensure sustainable debt levels, structural reforms are essential to boost economic growth and tax revenue.

Increasing productivity and investing in growth sectors will reduce the burden on public finances and improve the country’s ability to finance higher defense spending.