Schnabel warns of fiscal strain from global shifts and ageing
ECB Executive Board member Isabel Schnabel outlined the significant fiscal challenges facing the euro area, driven by geopolitical uncertainty and demographic shifts. Speaking in Berlin, she detailed how these factors impact public debt, investment, and potential growth.
Germany's investment-debt dilemma
Isabel Schnabel pointed to Germany's paradox of low public debt coinciding with low public investment, a critical issue given rising spending demands.
Additional defence and infrastructure outlays are projected to boost GDP, with investment-led packages offering a stronger positive impact on potential growth than consumption-heavy ones.
These expenditures, however, also increase public debt, with various fiscal adjustment scenarios illustrating diverse long-term trajectories.
The analysis stresses the need for structural reforms and productive investments to manage future fiscal burdens.
Across the euro area, government interest expenditures are rising, impacting several countries significantly.
Germany's potential GDP growth is also forecast to slow, largely due to declining contributions from labor and total factor productivity, a trend exacerbated by an ageing population.
Euro's growing safe haven appeal
Despite the fiscal challenges, the euro area exhibits increasing financial stability.
Converging sovereign spreads across euro area government bond yields, notably since early 2025, signal growing market confidence in the region.
This convergence stems partly from reduced credit and liquidity risk premia in several member states.
Moreover, the euro is increasingly serving as a 'safe haven' currency during global financial stress.
Analysis of financial asset co-movement with a safe-haven factor highlights the euro's enhanced role, particularly since April 2025. This trend is also evident in the euro's gradually increasing share in global foreign exchange reserves over the past two decades, solidifying its international standing.
This resilience offers a vital foundation for tackling the identified fiscal pressures.