National Bank of Denmark publishes working paper finding foreign debt news lifts German firms inflation expectations when trust in the ECB is low

The National Bank of Denmark has published a working paper presenting survey-experiment evidence that news of rising public debt in other euro-area countries can raise German firms' inflation expectations when firms doubt the European Central Bank will fully resist fiscal pressures. In the paper, pessimistic debt projections for France, Italy and Spain increased firms' one-year and three-year inflation expectations, with no detectable effect at the five-year horizon. The paper states that these are research findings by the authors and do not necessarily reflect the views of the National Bank of Denmark. The study uses a randomized information treatment embedded in the Deutsche Bundesbank's firm survey, in which German firms received optimistic or pessimistic projections for the average debt-to-GDP ratio of France, Italy and Spain over five years. Relative to the optimistic scenario, the pessimistic scenario raised debt expectations by about 16.7 percentage points and lifted one-year inflation expectations by 0.17 percentage points and three-year expectations by 0.42 percentage points in reduced-form estimates. The response was concentrated among firms with low trust in the ECB and among firms expecting relatively low future ECB policy rates, which the paper interprets as evidence that debt becomes inflationary when firms expect monetary accommodation of weak fiscal discipline. Complementary evidence from Germany's March 2025 announcement of a EUR 500 billion debt-financed infrastructure package found no comparable effect on German firms' inflation expectations, supporting the paper's distinction between debt news from fiscally fragile countries and debt news from the monetary union's perceived fiscal anchor.