The climate-fiscal timebomb: Germany

08 March 2026

Fiscal outlook

Germany recorded a 2.7% deficit and a debt-to-GDP ratio of 62.2% in 2024. It sits at the centre of Europe’s fiscal debate. After the 2025 election, a cross-party two-thirds majority amended the Basic Law to relax the “Schuldenbremse” for priority spending, which green-lit a €500bn special infrastructure fund and broadened defence carve-outs. An expert commission has now been launched to design longer-term reform options.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

Germany has experienced an increase in economic losses due to extreme weather events. The July 2021 floods caused about €33bn in losses and prompted a federal-state €30bn reconstruction fund. The total insured value of the damage amounted to €11bn, making 2021 the most expensive year in the past 50 years in terms of damages paid by insurers. Heat is biting too: 2023 heat-related labour capacity losses were valued at €863m ($1bn), and 2025 heatwaves are estimated to trim ~0.1 pp off Germany’s GDP. The impact of extreme weather on the country’s agricultural sector due to climate change has also been increasing, with an estimated annual revenue loss of €184m from 2018 to 2022.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Germany’s GDP declining by 10% by 2050 and 14% by 2070 under current policies. Our modelling shows the following:

Under current policies (BAU – business as usual), Germany’s debt is projected to be 52 pps higher than the climate-agnostic baseline in 2050 and 175 pps higher in 2070.

With early EU mitigation and sufficient adaptation spending, debt is 22 pps higher in 2050 and 36 pps in 2070.

Delayed EU investments and insufficient adaptation results in higher debt levels of 38 pps in 2050 and 70 pps in 2070.

EU early action combined with global cooperation results in 6 pps lower debt levels than the climate-agnostic baseline in 2050 and 28 pps lower levels in 2070.

Progressive taxation, such as a wealth tax, combined with EU early action would reduce debt by 22 pps in 2050 and by 59 pps in 2070 compared to the climate-agnostic baseline.