Germany acknowledged today its public finances faced a huge challenge as the Bundesbank and European Commission warned it risked falling into a debt trap due to its ageing population.
Handelsblattnewspaper said the European Commission would warn Germany of a potential explosion in debt due to the budgetary burden posed by a rapidly ageing population, in its annual public finance report.
The EU executive fears German debt could reach 384 per cent of gross domestic product (GDP) by 2050 if no action is taken and recently proposed welfare cuts do not go far enough.
German debt is currently some 61 per cent of GDP.
Bundesbank President Mr Ernst Welteke sounded a similar warning in an interview with Die Weltnewspaper.
Germany, he said, needed to address its budget deficit which risked remaining at or above the EU limit of three per cent of gross domestic product in the face of sluggish growth. Failure to take action would result in dramatically rising interest payments.
"We are being caught in a debt trap. The gap between income and spending is steadily increasing," Mr Welteke said.
The finance ministry report noted debt servicing costs in Germany now account for 15 per cent of the country's €250 billion a year budget compared with only 1.6 per cent in 1961.
Pensions, labour market and other social spending accounts for 47 per cent, double the level 40 years earlier. It acknowledged the situation could only get worse without reform, pointing out that by 2050 there are projected to be 80 people aged 60 or over for every 100 "active" members of the population.
"This makes it clear how heavy the burden of financing pensions will become," the finance ministry wrote.