When Germany shouts "at all costs"

In the face of geopolitical upheaval and economic challenges, the German government announced an unprecedented fiscal expansion plan on Tuesday evening, pledging to amend the constitution and "do whatever it takes" to revive the economy and strengthen national defense. This historic initiative will not only profoundly impact Germany itself but also herald significant changes in the European and even global landscape.

Deutsche Bank stated in a research report released on March 4 that this plan could be "one of the most important paradigm shifts in post-war German history," comparable in scope to the "reunification of Germany" 35 years ago, and may allow for unlimited borrowing for defense spending at a faster pace.

In another research report released on the same day, Deutsche Bank wrote that recent actions by the European Union will also work alongside Germany's fiscal plan to support the recovery of the European economy, bringing significant benefits to European stock markets. Considering the development status of European companies, the pace of interest rate cuts by the European Central Bank, and the impact of tariffs on European companies being less than that on American companies, Deutsche Bank is firmly optimistic about the future performance of European stocks and believes that small and mid-cap stocks focused on the domestic market will outperform large-cap stocks.

Deutsche Bank: The fiscal expansion plan is "one of the most important paradigm shifts in post-war German history"

Deutsche Bank wrote in its research report that the scale of this fiscal expansion far exceeds their expectations earlier this week. The plan will make three significant adjustments to the "debt brake" mechanism in the short term and convene the outgoing parliament (in which centrist parties still hold a constitutional majority) for deliberation:

1. Establish a special investment vehicle (SPV) of €500 billion for infrastructure investment, with €100 billion allocated to the federal states.
2. Reform the "debt brake" mechanism to exclude defense spending exceeding 1% of GDP, effectively allowing for unlimited borrowing for defense spending.
3. Modify the "debt brake" mechanism at the state level, raising the net borrowing limit from 0% of GDP to 0.35%, in line with the federal government's standard.

Deutsche Bank emphasized that the speed and expected scale of this fiscal expansion evoke memories of the reunification of Germany. However, unlike 35 years ago, the geopolitical changes driving current developments are far from optimistic.

The report also specifically mentioned that leaders of various German political parties have clearly stated that this decision is a "do whatever it takes" moment and are determined to "fully rearm." In this regard, Deutsche Bank analyzes that this strong rhetoric suggests that Germany may quickly utilize the unlimited defense borrowing space, potentially raising defense spending to at least 3% as early as next year, or even higher. The specific target may be determined after the NATO summit in June.

Deutsche Bank believes that there is a high likelihood of the Green Party agreeing to this agreement, as the €500 billion infrastructure fund may meet the Green Party's demands. However, the report also notes that it has not yet been confirmed whether the Green Party will agree to these constitutional amendments, which remains a significant source of uncertainty.

Deutsche Bank stated that in light of this series of major changes, they will update their forecasts for Germany's economic growth in the coming days. Currently, it appears that Germany's GDP growth in 2026 may significantly exceed the previous expectation of 1% However, considering that the outlook for 2025 will still be mainly influenced by global trade policies, Deutsche Bank may maintain its forecast of 0.5%.

Deutsche Bank: Firmly optimistic about European stocks, small-cap stocks outperforming large-cap stocks

In another research report, Deutsche Bank expressed an optimistic outlook for European stocks from the perspectives of recent EU actions, the development status of European companies, the pace of interest rate cuts by the European Central Bank, and the impact of tariffs on European companies.

The report stated that, in addition to the German government's "whatever it takes" plan, European Commission President Ursula von der Leyen proposed to relax carbon dioxide emission standards for the European automotive industry to ease the burden on car manufacturers. At the same time, she also plans to raise about €800 billion for defense to address the increasingly complex geopolitical situation.

Both proposals will be discussed and decided this Thursday. If passed smoothly, they will undoubtedly inject new vitality into the European economy.

Previously, European Commission President von der Leyen stated that the EU plans to provide €150 billion in loans to promote defense spending. In addition, the EU also plans to launch a mechanism that allows member states to use an additional €650 billion from their national budgets for defense over the next four years without facing budget penalties.

In addition to the improvement in the external environment, the performance of European companies themselves is also worth noting.

Deutsche Bank's research report shows that the earnings of the constituents of the STOXX Europe 600 Index (excluding the energy sector) grew by 10% year-on-year in the fourth quarter of 2024, far exceeding market expectations and completely in line with Deutsche Bank's forecast. Deutsche Bank expects that earnings in the first quarter of this year will also be similarly strong.

In terms of monetary policy, the European Central Bank and the Federal Reserve have also shown a divergence in their actions.

Deutsche Bank expects the European Central Bank to announce an interest rate cut this Thursday, while the Federal Reserve may not take any further rate cuts this year. This expectation will undoubtedly further enhance the attractiveness of the European stock market. However, Deutsche Bank also warns that higher spending may put pressure on long-term bond yields. Therefore, they have ended their "long-term bullish" view on German government bonds.

In terms of economic data, Europe and the United States are showing completely different trends. The economic surprise index in Europe continues to rise, while the economic surprise index in the United States is continuously declining. This indicates that the economic performance in Europe is exceeding expectations, while the economic performance in the United States is falling short of expectations.

This also makes the market realize that tariffs not only have adverse effects on Europe, but American companies are also under significant pressure.

According to CCTV News, on March 3, local time, U.S. President Trump stated that the 25% tariff on goods from Mexico and Canada will take effect on March 4, and reciprocal tariffs will begin to be imposed on April 2.

In response, Deutsche Bank stated that companies producing in the United States now need to pay a 25% tariff on imported goods from Mexico and Canada, and they may soon also have to pay tariffs on imported goods from Europe.

In contrast, European companies have an exposure of about 21% to the U.S. market (taking the STOXX Europe 50 Index as an example), but 80%-90% of that revenue is generated locally Therefore, Deutsche Bank believes that European companies are not necessarily more affected by tariffs than American companies.

Deutsche Bank stated that although European stock markets have significantly outperformed American stock markets this year, it remains optimistic about the future performance of European stock markets. Among them, European small and mid-cap stocks are expected to outperform large-cap stocks, as these companies are more focused on the domestic market and can benefit more from the recovery of the European economy.

In addition, Deutsche Bank also believes that while the possibility of a ceasefire agreement is difficult to quantify, if achieved, it will provide additional upside potential for European stock markets