European Central Bank’s Isabel Schnabel sets out fiscal challenges from defence needs and ageing and highlights growth and debt trade-offs from spending choices

European Central Bank Executive Board member Isabel Schnabel delivered a speech on fiscal challenges amid geopolitical uncertainty and ageing societies, focusing on how higher public spending needs and weaker medium-term growth prospects interact with debt sustainability and market conditions in the euro area. The presentation contrasted Germany’s relatively low debt-to-GDP ratio with historically low public investment and used Bundesbank, European Commission and ECB staff calculations to illustrate that additional defence and infrastructure spending can support GDP, but that the growth and debt effects depend on how the package is allocated. The debt path was shown under scenarios including minimum Stability and Growth Pact compliance with an investment-led package versus a mixed composition with a 50% government consumption share, as well as a scenario with no additional consolidation; the minimum-compliance assumptions referenced a total allowed deviation of 0.6% of GDP and use of a national escape clause for an additional 1.5% of defence spending. Schnabel also highlighted projections pointing to rising government interest expenditure and weaker potential GDP growth, alongside market indicators showing more convergent euro area sovereign spreads versus the overnight index swap rate and changes in five-year sovereign yields since January 2025. The speech further presented evidence consistent with the euro increasingly behaving as a “safe haven” and showed the euro’s share in global foreign exchange reserves through the third quarter of 2025.