Germany’s ambitious €500 billion fiscal overhaul is transforming its economic landscape, forging a new path by temporarily setting aside debt rules to invest heavily in infrastructure and defense sectors. This move has sparked enthusiasm in markets, with a significant surge in defense stocks, and analysts are heralding this as a significant turning point for European economic growth.
For years, Germany was synonymous with fiscal conservatism, characterized by strict adherence to spending limits and a reluctance to employ debt-financed stimulus measures. However, the dynamic shifts with U.S. President Donald Trump’s push for Europe to take a more active role in its defense, which has invigorated Germany’s approach to fiscal policy.
The coalition led by CDU/CSU and SPD is now championing an unprecedented fiscal package. This includes a €500 billion off-budget infrastructure fund to be allocated over a decade, bypassing the country’s debt brake rules. Additionally, defense spending exceeding 1% of GDP will be exempt from these rules, unlocking an extra €11 billion annually. The structural deficit allowance for states is also set to increase from 0% to 0.35% of GDP to support this shift.
As the Bundestag gears up to pass this comprehensive reform package before the new parliament convenes on March 25th, where the coalition currently holds the required majority, European equities are witnessing a new wave of optimism.
The DAX index has shown a 16% increase year-to-date, outperforming its U.S. counterparts. The defense sector is leading this charge, with the STOXX Europe Aerospace & Defense ETF recording over a 40% year-to-date gain. Major players in the defense industry, such as Hensoldt AG, Rheinmetall AG, Thales S.A., and Leonardo S.p.A., have seen their shares skyrocket.
Analysts at Goldman Sachs and ABN Amro have labeled Germany’s fiscal move as a “game changer” and likened it to former ECB President Mario Draghi’s “Whatever it takes” pledge during the eurozone crisis, respectively.
This fiscal expansion is not only invigorating investor confidence but also resetting economic forecasts. Goldman Sachs has upgraded its German GDP growth predictions, while Carsten Brzeski of ING hails it as a “historic U-turn” from Germany’s debt brake policy.
The Eurozone is poised to benefit from spillover effects, with GDP expected to see an additional lift from this fiscal injection. While the European Central Bank now faces a more complex scenario, there’s a sense that the large-scale fiscal stimulus could recalibrate the central bank’s approach to interest rates.
This seismic shift in Germany’s fiscal policy represents more than just economic numbers; it symbolizes a profound rethinking of how Europe tackles growth and security challenges. The success of this strategy, while promising, remains contingent on navigating political and geopolitical hurdles. Nonetheless, investors are bullish on the prospects of Europe’s major economic engine reigniting.
Source: https://www.euronews.com/business/2025/03/07/germanys-whatever-it-takes-moment-fiscal-bazooka-ignites-market-rally
