Europe's Death Spiral: Now Germany Is the Problem

The flaws in Europe’s financial system — and the eurozone dissolution that will inevitably result — have been obvious for a while. Here’s a list of posts on this topic from the past few years:

Can The Euro Be Saved? (4/23/23)

Easy Money Makes You Stupid, Europe Edition (6/19/23)

Europe is Falling, and France Is Leading the Way (12/3/24)

The Euro is Doomed if Germany Fails (12/21/24)

Germany Chooses Inflation. Bond Investors Say "No Thanks" (3/6/25)

Germany Crosses a Line

European countries provide their citizens with generous pensions and health care benefits that are funded “pay as you go.” Instead of at least pretending (like the U.S.) to put aside money for Baby Boomers’ inevitable retirement, most of Europe just pays for entitlements out of current-year budgets.

This was fine while Boomers were working and paying taxes, but now that they’re aging out of the workforce and drawing on the sweet retirement plans they designed for themselves, the costs to European governments are skyrocketing.

Combine rising pension costs with falling birth rates that produce fewer young taxpayers, wide-open borders that flood the continent with migrants who are, at least initially, a drain on societal resources, and a dramatic Trump-driven military buildup, and the result is an almost across-the-board surge in deficits that have to be financed with new borrowing.

Germany Becomes the Problem

There was a time when it was possible to brush off peripheral Europe’s obvious financial weakness by just assuming that Germany would ride to the rescue. The EU’s industrial powerhouse would always support the European Central Bank, allowing Italy, Greece, et al to sell as many bonds as they wanted into a market that viewed their debt as de facto German paper.

But those days have ended, as Germany, through a series of epically bad policy decisions, has morphed from financial bedrock to future bankruptcy candidate.

And this year it crossed a line: The taxes allocated to Germany’s versions of Social Security and Medicare no longer cover the related costs, with the shortfall having to be borrowed. This is the stage of a Ponzi scheme where the operator starts to panic.

Here’s a more in-depth explanation of Germany’s (and by implication Europe’s) death spiral, from economist Peter St Onge: