„Parts of the periphery are developing well – some of the core countries are causing concern“
Mr Hornung, in terms of creditworthiness, I see two problem children in Europe. France's debt is rising rapidly, and Germany is debating whether to abandon its restrictive budget policy. How do you assess this from a rating perspective?
France and Germany are indeed in the spotlight. Nevertheless, the trend in parts of Europe is positive. We have recently upgraded the ratings of Croatia and Cyprus. The stability of Portugal and Ireland has also improved. Even for Greece, an investment grade rating in 2025 is once again within the realm of possibility. Many economists thought this was impossible after the euro crisis. The example shows: Yes, it is possible to get out of a seemingly hopeless budget situation.
And elsewhere?
Italy is quite stable at its current rating level. Prime Minister Meloni is ensuring a certain degree of political, economic and fiscal stability, which is having a supportive effect on the Baa3 rating. In short, while parts of the periphery are developing well, some of the core countries are causing concern. Here, France and Germany are indeed in the spotlight with their respective ratings.
And where does France stand?
France now has a stable rating outlook after the downgrade to Aa3 (from Aa2); at the same level as the UK and Belgium. At the new rating level, we consider France's economic strength and systemic importance to be so great that the prevailing risks – especially in the fiscal area – are currently balanced out.
There are no magic figures!
But the debt is still increasing. When will the tipping point come?
As far as debt is concerned, there are no magic figures! The assessment is more comprehensive. We have four basic rating factors: economic strength, institutional strength, fiscal strength and event risks. In terms of event risks, we look at politics, liquidity, the banking system and foreign trade. France's weakness lies in the fiscal pillar, Germany's in the economic pillar. However, Germany still has the top Aaa rating overall, together with Luxembourg and the Netherlands in the eurozone.
How high does the debt ratio have to rise for there to be a change in credit rating?
The overall view is decisive. In the case of the eurozone, countries that have a greater influence on the euro reserve currency, such as Germany and France, also benefit from this: Debt levels carry less weight in our analysis here than debt sustainability, measured by interest payments relative to government revenue.
Europe is currently quite vulnerable to the threat of a trade war.
How big do you think the credit risks from trade policy are following the tariff threats from the new US President Donald Trump?
The threat of a trade war is evident. Europe is currently quite vulnerable in this respect, especially as France and Germany are running out of steam as a political and economic engine due to domestic political developments. The extent to which economic risks will turn into fiscal risks remains to be seen.
Germany's strengths lie more in the „sunset industries“, which are dominated by older technologies, and is rather weak in the „sunrise industries“.
New technologies such as artificial intelligence often lead to disruptive processes in national economies and can quickly change the competitive position of entire countries. What does this mean for Germany?
AI harbours risks, but there are also hopes associated with AI. These include a positive impact on productivity. However, Germany's strengths lie more in the „sunset industries“, which are dominated by older technologies, and is rather weak in the „sunrise industries“, the strategically important future technologies such as IT, including AI and big data. This is a cause for concern from an economic perspective.
In what respect?
Growth levels in the industries of the future are higher. In addition, tariffs on cars, mechanical engineering or chemicals would be particularly painful for Germany and Europe in the event of a trade war. Conversely, counter-tariffs on technology products from the USA appear to be of little use, as these technology products are required as inputs and there are often no equivalent European substitutes.
Germany is currently suffering less from an erosion of its fiscal pillar than from the anaemia of its economic strength.
There is currently a heated debate in Germany about the debt brake. Does it need to be relaxed?
At the moment, Germany is suffering less from the erosion of its fiscal pillar than from the anaemia of its economic strength. Public investment in infrastructure, research and development and training is positive for growth and productivity. Therefore, also for a country's credit rating.
The Bundesbank's proposal could indeed lead to more public investment without compromising medium to long-term fiscal discipline.
.......so would you be in favour of a relaxation?
The ideal solution would be to shift spending away from consumption and towards investment. If a relaxation leads to more public investment without compromising medium to long-term fiscal discipline, then it could make sense from an economic perspective.
What do you think of the Bundesbank's proposal for changes to the debt brake?
The Bundesbank's proposal could indeed lead to more public investment without compromising medium to long-term fiscal discipline.
