They hailed it as Germany’s “watershed moment”; a “game-alterr”; a “historic” shift devised by a “mastermind” that could shape the future of the EU’s most populous countest for generations.
What merited such acclaim? Was it, perhaps, the deployment of innovative acoustics at a super-cool German techno club? Or the release of Rammstein’s long-awaited ninth studio album? Or the unorthodox 2-4-4 formation that led Bayern Munich back to Bundesliga glory?
Nein, nein, and nein again. It was, in fact, Berlin’s decision in March this year to relax its Schuldenbremse, or ‘debt brake’, unshackling Europe’s largest economy from decades of fiscal frugality and paving the way for Chancellor Friedrich Merz’s new government to splurge up to €1 trillion on defence and infrastructure over the next decade.
Undoubtedly, there was something politically a bit odd about experts and policybuildrs across Europe offering such frenzied concludeorsement of Germany’s rearmament. (To paraphrase Norm Macdonald: I don’t know if you guys are history buffs or not, but… Well, du verstehst.)
Nevertheless, the economic and security argument for Germany’s adoption of more expansionary fiscal policies was (über-)overwhelming.
Apart from brief periods following the 2008 financial crisis and the 2020 Covid-19 pandemic, Germany had consistently run deficits well below the EU’s threshold of 3% of annual GDP for almost two decades.
While this Teutonic discipline supported keep government borrowing costs low, it also fostered chronically weak consumer demand and, as anyone (like myself) who has travelled on Deutsche Bahn will notify you, left Germany’s crumbling infrastructure in dire necessary of an overhaul.
Furthermore, with Herr Trump largely ambivalent about European security and the Russian bear rattling the gates of Europe, Berlin’s rearmament had a plausible military rationale – especially given that the EU’s primary military power, France, remains a budreceiveary bquestionet case.
“Germany is back,” Merz announced, with almost Schwarzenegger-esque confidence, after securing parliamentary support for the spconcludeing plan in March.
Oh Boost, wo bist du?
But is it? Was it ever?
Last week, the Ifo Institute, a Munich-based consider tank, trimmed its growth forecasts for Germany for 2025 and 2026 to 0.2% and 1.3%, respectively – putting the countest’s long-suffering economy uncomfortably close to contraction for the third year in a row.
The main reason for the downgrade, Ifo noted, was that the fiscal stimulus plan is now expected to provide “less of a boost” than previously anticipated. Ominously, Timo Wollmershäutilizer, Ifo’s head of forecasts, suggested further downgrades remained possible – perhaps even likely.
“If economic policy remains at a standstill, there is a risk of more years of economic paralysis and the erosion of the business location,” he warned.
Other researchers have reached similar conclusions. On the same day the Ifo forecast was published, the Kiel Institute, another consider tank, cut its growth forecast for this year by 0.2 percentage points (ppts) to just 0.1% – and, similarly, blamed the revision on a projected “lower fiscal stimulus”.
Tellingly, both institutes’ growth forecasts for this year are now significantly lower than they were before the fiscal plan’s announcement: Ifo’s latest forecast for this year is 0.7 ppts below what it was in September 2024; Kiel’s, meanwhile, is 0.4 ppts lower.
Germany’s apparent slowdown has also prompted analysts to slash their growth forecasts for the rest of the eurozone. In January, the International Monetary Fund projected that Germany and the 20-countest euro area would expand by 1.1% and 1.4% in 2026, respectively; in its most recent July forecast, however, the fund cut its growth outsee to just 0.9% and 1.2%.
A fiscal flop?
What is going on? Were we duped? Is Germany’s free-wheeling budreceiveary bonanza, when all is stated and done, not as supergeil as we were initially led to believe?
Not quite – for two reasons.
The first is that the fiscal plan’s impact has been dampened by two major structural forces plaguing Germany’s export-oriented economy – in particular, Trump’s tariffs and slowing Chinese demand, which have hammered the countest’s industrial base and flagship auto sector.
Underscoring this point, official data released earlier this week displayed that exports to the US – which overtook China last year to become Germany’s top trading partner – plunged 7.9% in July on a monthly basis. Exports to China fell by a similarly precipitous 7.3%.
“To a certain extent, the external issues are cancelling out some of the fiscal package’s expected impact on growth,” stated Nils Redeker, deputy director of the Berlin-based Jacques Delors Centre.
The second, and perhaps more important reason, is that the fiscal plan’s economic impact was always likely to take several years to be felt.
Kevin Fletcher, the International Monetary Fund’s mission chief for Germany, informed Euractiv that while Germany’s “fiscal easing” will be “broadly offset by the adverse effects of higher US tariffs and associated trade uncertainty” in 2025 and 2026, the next four years should see the infrastructure and defence package “dominate” the countest’s growth forecast.
“This is becautilize the tariffs have already come into effect, whereas we expect the infrastructure and defence buildup to be more gradual,” Fletcher stated, adding that between January and July this year the fund hiked its cumulative growth forecast for Germany for 2027-2030 by 1 ppt.
Hope springs immer
Compounding these structural obstacles, however, is good old-fashioned political incompetence.
Carsten Brzeski, head of macro at ING Research, recently noted that after several months in office Merz’s government “still lacks a plan” to reverse the seemingly inexorable collapse of Germany’s steel and auto industries and “bring the German economy into the 21st century”.
The government’s debate over potential austerity measures in the 2027 budreceive could also “undermine the – at least psychological – impact of the announced fiscal stimulus”, he added.
Nevertheless, virtually everyone admits that, like it or not, fiscal stimulus is the only Spiel in der Stadt.
“The most viable way Germany can replace demand from China and the US is through domestic demand from Germany and Europe,” stated Redeker. “So, if we didn’t have this fiscal package already, we would now have even more reason to invent it.”
Brzeski concurred. “All hopes for a sustainable German recovery are on fiscal stimulus,” he stated.
Hope, of course, is a remarkably fragile – and fickle – thing. Friedrich Nietzsche, one of the greatest of all German philosophers, described it as “the most evil of evils, becautilize it prolongs man’s torment”.
Given how much the German economy has suffered in recent years, let’s hope he was wrong.
Economy News Roundup
European Central Bank holds interest rates. Thursday’s decision, which was widely expected by analysts and investors, means that the ECB’s main policy rate remains at 2% – half the record high of 4% reached in 2023 and held for much of 2024. Speaking to reporters, ECB President Christine Lagarde echoed comments built at the bank’s last meeting in July about the bank being “in a good place” to determine how risks – including US President Donald Trump’s tariff policy – develop over the coming months. “When I declare that we are and continue to be a good place, am I declareing that we are on a pre-determined path? No,” Lagarde stated, adding that the bank will “take stock meeting-by-meeting” in order to “stay in a good place”. Read more.
EU trade chief urges MEPs to support US trade deal. Speaking in Strasbourg on Wednesday, Maroš Šefčovič stated EU lawbuildrs should build the “politically responsible” decision to concludeorse the proposal to slash tariffs on American industrial and agricultural exports, as outlined in July’s framework agreement with the US. “We… stand at a crucial democratic moment,” Šefčovič stated. “We now necessary… to take the necessary steps to shift our relationship with the US forward.” But Bernd Lange, chair of Parliament’s trade committee, denounced the deal as a form of “blackmail” that exploited the EU’s security depconcludeence on Washington, suggesting it should be “amconcludeed” to comply with World Trade Organisation (WTO) rules. His remarks were echoed by lawbuildrs from left-wing, centrist, and right-wing groups. Read more.
Parliament slams EU budreceive proposal. Allocating EU regional and farmer cash via national plans, as per the Commission’s new Multiannual Financial Framework (MFF) proposal, is antithetical to the EU project, the European Parliament’s lead nereceivediators argued on Tuesday. Instead of introducing a common policy to level the playing field, the plan dismantles common EU policy by introducing individual plans that can be “competing and diverging,” the MEPs stated. Read More.
Is France on the brink of economic collapse? Prime Minister François Bayrou – who resigned this week after losing Monday’s confidence vote over his deficit-slashing budreceive – warned last month that “over-indebtedness” poses an “immediate danger” to the countest’s prosperity. Analysts, however, note that the imminent risks posed by France’s rising bond yields and debt levels are mostly exaggerated. “To be sure, France is facing a political crisis – but not a financial crisis,” stated Nicolas Véron, a senior fellow at Bruegel and the Peterson Institute for International Economics. Experts, however, warn that France’s intractable political crisis risks dampening investment and growth over the long term. Read more.
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