The limits of indebtdness are drawing ever closer. Over the past 25 years, the global debt ratio has roughly doubled. And recently, the USA, the world's largest debtor, has also been considering the idea of further increasing its debt.

This is because all of future US President Donald Trump's plans will ultimately mean the dollar becoming weaker, tax revenues eroding, and spending tending to grow further. The big question is to what extent creditors will accept this. How the financial market players will react seems to be foreseeable.

Deka chief economist Ulrich Kater has already recognised some signs that the risk premiums for US securities are rising slightly in the run-up to the change of president, as he indicated at the Financial Market Round-Table organised by DekaBank, the German Economic Institute (IW) and Börsen-Zeitung.

And LBBW Chief Economist Moritz Krämer refers to a forecast by his former employer, the rating agency Standard & Poor's (S&P), according to which the US debt ratio could rise to up to 228% of GDP by 2060. The Peterson Institute assumes that Trump alone will be responsible for 25 percentage points of this increase.

Krämer does not believe that credit ratings are good indicators. In the past, they have already shown too much consideration for the industrialised countries. Even in the most recent crises, they refrained from downgrades that were actually necessary. In this respect, credit ratings are not a signalling device for any looming crisis.

However, it is not clear whether this crisis will originate in the USA, Europe or China. The financial markets are currently painting a rather „deceptive picture“ with regard to the US debt situation, says Kater, because a crisis could escalate very quickly. The trigger could be when Trump „turns the US Federal Reserve into a department of the Treasury“.

Krämer believes that the next debt crisis is more likely to occur in Europe. In his opinion, this could possibly happen already at the end of this decade. Europe's major shortcoming is the centrifugal forces acting at all levels – in the economy, in public finance and in politics. He assesses the situation in France as a particularly dangerous development. With regard to the development of its debt, he considers this to be much more dangerous than Greece was at one point. In addition, Europe is becoming less and less capable of acting politically, and the financial policy room for manoeuvre is becoming ever narrower. „If a new pandemic occurs, Europe will be left naked in the next crisis“, Krämer commented.

Germany has a comparatively low debt ratio of just under 60% of GDP, which actually gives Berlin more room for manoeuvre than countries such as France or Italy. However, it has restricted itself with the debt brake, and recently cut back on investments in order to be able to finance social spending. Economists say that these failures are now backfiring on politicians and the economy. In addition, the failure to modernise the infrastructure is eroding the basis for growth and causing companies to despair. Germany is becoming less attractive as a business location.

One element of the economists camp demands compliance with the debt brake, and points to budget restructuring. The other believes it is necessary to react quickly, to adjust the debt brake for future requirements, but to outsource the financing of major investment decisions to a special fund. This is because the money from the regular budget could not be realised with the necessary speed, and on the required scale.

Deka chief economist Kater believes that debt financing is also responsible in terms of intergenerational fairness. After all, infrastructure investments are „intergenerational expenditure“. Especially as, he argues, it does not help the next generation if the national debt is low, but the business location is no longer internationally competitive. However, he considers another political tendency to be dangerous, which is increasingly restricting the political and financial room for manoeuvre: with reference to its tight financial situation, the state seems unable to prioritise expenditure towards more investment purposes.

Ultimately, according to LBBW chief economist Krämer, the government has no other option, given the additional expenditure being accumulated. He points to the costs of an ageing population, rising interest expenditure, necessary additional investments, and higher defence spending.

In view of the looming financial burdens, the two economists believe that even stronger political leadership is needed in future, which clearly prioritises and, if necessary, rejects citizens' spending requests. „If politicians do not manage to make the public aware of budget limits, restructure the budget accordingly, and convince citizens of this, the mood will become very explosive," says Kater.“

Krämer calls for a „mindshift“ in politics. In future, it must be „less dogmatic and ideological, less focussed on the administration of the present, and more concerned with solutions for the future.“