In a historic break from decades of fiscal restraint, Germany is set to unleash a wave of spending on defence and infrastructure, opening a new chapter for Europe’s largest economy. Chancellor-in-waiting Friedrich Merz has proposed exempting defence spending above 1% of GDP—approximately €45 billion based on current economic size—from the country’s constitutional debt brake, a rule capping the structural budget deficit at 0.35% of GDP. Paired with this, a €500 billion special fund over the next decade aims to refresh Germany’s aging infrastructure and support an economy teetering on the edge of a third consecutive year of recession. This shift, triggered by the Trump administration’s wavering NATO commitment and favouring peace with Russia, pushing Germany’s to reinforce its security and economic adaptability. For investors, this pivot presents a rare opportunity to capitalize on a changing landscape.
The impact of Germany’s spending plans are substantial for investors, with several sectors positioned for growth. The defence industry stands to thrive as Germany ramps up military spending to modernize its armed forces, likely exceeding the NATO target of 2% of GDP once a €100 billion special fund from 2022 is depleted by 2027. Companies like Rheinmetall, a leading German defence contractor, and Hensoldt, a key player in defence electronics, could see a influx in contracts and revenues. Meanwhile, the €500 billion infrastructure fund, translating to €50 billion annually will benefit engineering giants like Siemens and construction firms such as Hochtief. Beyond these direct winners, the fiscal stimulus could lift the overall German and European economies, supporting equities and hopefully strengthening the euro, which has already risen to a four-month high of $1.08 following the announcement. If the funds to prioritize green energy or digital infrastructure, additional opportunities may arise in those high-growth sectors.
However, opportunities do not come without a risk. Politically, the proposals require a two-thirds parliamentary majority, and while the current Bundestag offers a window for approval before March 25, securing support from the Greens—who demand broader debt brake reforms—remains difficult. Economically, increased borrowing could stain Germany’s fiscal reputation, though its solid credit rating might mitigate immediate concerns over rising debt costs. Geopolitically, this shift might complicate relations with the U.S. or heighten tensions with Russia, straining tensions between these nations. Timing is critical with delays or opposition could stale momentum, making this a high stakes play that demands careful navigation.
Source: Reuters
Photos: Unsplash
