Despite the high and stable credit ratings that Germany has enjoyed over the years, the Bund is not immune to change. Fiscal and political realities, now front and centre in the country, are combining to challenge the historic standards of German sovereign credit.
Right wingers Alternative for Germany (AfD) found electoral success over the weekend in the east of Germany, securing a victory in a poll in the State of Thuringia and a significant share of the vote in Saxony. It was alarming not least because it is the first time since the Nazis that the far right have had electoral success in Germany.
Nobody is predicting an imminent repeat of that catastrophe, although the social consequences of the poll results are not to be taken lightly. But AfD, an entity that Germany’s domestic intelligence agency has described as a "suspected case of extremism”, has not found a foothold in the east of the country by coincidence.
Economic hardship is rife in the east of the country. Research from the Bundesbank last year found that the median household wealth in eastern Germany stood at €43,400 in 2021, compared to €127,900 in the west.
The underperformance of the German economy over the past two years has exacerbated this difference. When asked why the German economy is struggling, economists often point to low public investment. The electorate meanwhile, or a portion of it, blames whatever populist parties like AfD propose as the cause.
It is the economic performance that matters most, and in particular Germany’s enthusiasm for fiscal rectitude. At the heart of this discussion is the country's debt brake law. Enshrined in the constitution, it is designed to limit the level of government borrowing.
But it is the poorer, eastern German states, with lower tax revenues, that it constrains the most. These states have become a playground for political parties that hang about on the fringes and extremes of the ideological spectrum.
Intended to be a protector of the Bund’s triple-A credit rating, the debt brake may actually contribute to toppling it.
Low debt is not the only ingredient for a high credit rating. Structural economic performance, political stability and policy flexibility all matter as well.
Fiscal constraints, that fuel the rise of extremist parties, will become harder to remove if a new political landscape - namely the advent of fringe parties like AfD to positions of government - results in a policy deadlock. A vicious circle like this creates a threat to the credit rating of the Bund.
Last year, Moody’s, a credit rating agency, revised its triple-A rating for the US from stable to negative. Moody’s said that one of the reasons for its decision was a division in Congress that raised the risk of the government “not be[ing] able to reach consensus on a fiscal plan to slow the decline in debt affordability”.
Even though the US problem is centred around its fiscal deficit, the possibility of political deadlock blocking the road for fiscal change was the driving force behind the decision.
Closer to Germany, in all senses, is France. A hung and polarised parliament obstructing fiscal reform as the country's budget deficit spirals ever higher, alongside elevated bond yields, could signal an impending change to the rating of French sovereign credit.
The Bund is the king of the eurozone public sector capital markets, but the threat that political polarisation presents to its fiscal future risks putting its credit rating in check.