Fiscal changes a turning point for the German economy?

Germany's upcoming fiscal shift could have a major impact on its struggling economy as well as on European defense.

Fiscal and economic policies were contentious issues in Germany's previous governing coalition, contributing to its collapse late last year. As negotiations continue to form a new governing coalition, the CDU/CSU - which led the polls in February - and the Social Democratic Party (SPD) appear to have made some progress.

On March 4, Friedrich Merz, the likely German chancellor, and other political leaders unveiled plans to reform Germany’s longstanding fiscal rule known as the “debt brake” to allow for increased defense spending. They also unveiled a special 500 billion euro ($535 billion) fund to invest in infrastructure.

Putting these plans into practice would require a two-thirds majority in the German parliament to change the constitution. This is possible now, but will be difficult to achieve when the new parliament meets for the first time later this month.

As a result, a vote on constitutional amendments could be pushed forward as early as this week.

Người dân Đức mua sắm tại siêu thị. Ảnh minh họa

German people shop at a supermarket. Illustration photo

'Big, bold, unexpected - a turning point'

“Big, bold, unexpected – a turning point for the economic outlook,” economists and analysts at Bank of America Global Research wrote in a note on March 5, saying the fiscal package would “dramatically alter” Germany’s economic outlook.

The German economy has been stagnant for the past few years and is at risk of a technical recession, defined as two consecutive quarters of GDP decline. Germany's GDP has fluctuated between growth and contraction throughout 2023 and 2024.

The country is facing a number of problems, including crumbling infrastructure, a struggling housing sector and pressure on some key industries that have contributed greatly to economic growth, such as the auto sector.

Now, there is hope for change. Experts believe that the planned special investment fund could benefit the German economy.

The market may be expecting an economic boost and Germany's growth forecast may be raised, Florian Schuster-Johnson, senior economist at Dezernat Zukunft, said on March 5.

“I think in the short term this will boost domestic demand, as there will be a huge demand for workers to build new infrastructure and companies will get orders from the government,” he said.

Increased defense spending could also have a lasting impact on the economy, leading to increased manufacturing capacity that could be used for civilian purposes in the future, Mr. Schuster-Johnson added.

This could help Germany surpass NATO's current defense spending target of 2% of GDP, according to economists at Deutsche Bank Research.

Mr. Friedrich Merz said that the current geopolitical situation shows that major measures are needed to strengthen the security and defense capabilities of Germany and Europe.

While these policy statements are generally positive, other fiscal and budget plans from the incoming coalition are still being discussed and could have their own impact on the German economy, according to Carsten Brzeski, global head of macroeconomics at ING.

“ We do not rule out the possibility that formal coalition talks will still result in some spending cuts, which could dampen the positive impact of the announced fiscal stimulus package ,” he said.

In another development, parliamentarian Bernd Baumann, a member of the far-right Alternative für Deutschland (AfD) party, said the party is conducting a preliminary legal assessment of the government's statement and reserves the right to take countermeasures if necessary.

Policy details

In detail, the €500 billion special investment fund will not be part of the federal budget but will be financed through credit without creating new debt. The money will be used over 10 years, focusing on transport, energy, education, civil protection and other infrastructure. The federal states will also be allocated a portion of the fund to support their finances.

To avoid being limited by the “debt brake” rule, the fund would be incorporated into the constitution and exempted from fiscal regulation.

Currently, the “debt brake” rule limits the amount of debt the government can borrow, and stipulates that the federal government’s structural budget deficit cannot exceed 0.35% of the country’s annual GDP.

One key change in the new plan is that defense spending exceeding 1% of Germany's GDP will no longer count toward the "debt brake" ceiling, meaning it will no longer be capped.

German states will also be allowed to borrow more than before, while long-term proposals to modernize “debt brake” rules and boost investment will also be implemented.

The proposed “debt brake” reform also marks a major departure from the CDU-CSU election campaign, in which the parties repeatedly stated their desire to maintain the rules of former Chancellor Angela Merkel. However, Friedrich Merz later suggested he might be open to some reforms.

Market reaction

The plans have generated a strong market reaction. Germany’s DAX index rose 3.4% by midday on March 5 (London time), leading the gains in the pan-European Stoxx 600. Construction and manufacturing companies posted significant gains, along with German banks.

German borrowing costs have soared. The yield on the 10-year German government bond, the euro zone's benchmark, has risen more than 25 basis points, while the yield on the two-year bond has risen more than 16 basis points.

The market reaction showed surprise at the speed and scale of the proposed changes, according to Florian Schuster-Johnson from Dezernat Zukunft.

“ The bottom line is that Germany is back and has the funding ,” he said. “ The move we’ve just seen is really remarkable. The Germans sometimes act late and are slow when big steps are needed, but when they do, they do it very thoroughly .”

Source: https://congthuong.vn/thay-doi-tai-khoa-la-buoc-ngoat-cho-nen-kinh-te-duc-377011.html