Germany Must Address Structural Weaknesses to Maintain AAA Credit Rating, Ratings Agency Warns

Germany faces pressure to overcome structural impediments if it aims to preserve its coveted AAA credit rating, according to Eiko Sievert, executive director at Scope Ratings.

"Weakened GDP growth alone does not pose an immediate risk to Germany's AAA status, even with potential economic stagnation persisting until 2025," Sievert stated. "Nevertheless, rating pressure will escalate if Germany fails to resolve its root causes of sluggish growth."

Germany's economy endured a second consecutive year of contraction in 2024, attributed to declining exports amid subdued global demand and heightened competition, notably from China. Divisions over economic recovery strategies within Chancellor Olaf Scholz's multi-party coalition contributed to its disintegration last year, solidifying the economy as a primary concern for German voters.

Sievert pinpointed specific structural weaknesses that hinder Germany's economic vitality. These include elevated energy prices, which "adversely impact domestic production and export prowess," insufficient investments in infrastructure, education, and digitalization, coupled with sluggish labor market reforms that erode international competitiveness.

While Germany boasts a relatively low national debt of approximately 63% of GDP, providing an advantage over other major European economies in terms of creditworthiness, Sievert emphasized that this factor alone does not guarantee AAA status. He highlighted that other nations within the AAA bloc exhibit an even lower average debt burden of around 36%.

"Among AAA-rated countries, Germany stands out with the highest sovereign debt level," Sievert noted.

Germany's "debt brake" mechanism, which restricts government borrowing to 0.35% of GDP, serves as a cornerstone of the nation's fiscal policy landscape, Sievert acknowledged. However, he proposed that reforming the debt brake to facilitate increased public investment could yield positive outcomes for economic growth.

"To combat Germany's gradual decline in competitiveness, the incoming government should prioritize substantially boosting investments," Sievert urged.

Germany gears up for snap national elections on February 23. Moody's, Standard & Poor's, and Fitch Ratings currently maintain Germany's AAA credit rating.