Impacting the Global Market! Four Key Questions about Germany's "Fiscal Rocket Launcher"

Germany has long been regarded as the "model student" of European fiscal discipline, firmly adhering to the "debt brake" policy. However, a sudden storm seems to be shaking the country's long-standing stance on fiscal austerity. A recent research report released by Deutsche Bank delves into Germany's recently proposed massive fiscal expansion plan and raises four key questions, providing important perspectives for understanding this event that could change the global market landscape.

This Tuesday, Germany's two ruling parties, CDU/CSU and SPD, reached a stunning agreement to launch a large-scale fiscal expansion, breaking the constitutional debt limits. Deutsche Bank bluntly pointed out that this could be the most significant shift in Germany's fiscal system since reunification.

The core content includes:

• Establishing a special fund of €500 billion for public infrastructure investment, with €100 billion allocated to the federal states;
• Reforming the debt brake rules to exclude defense spending exceeding 1% of GDP, effectively allowing unlimited borrowing for defense;
• Reforming the debt brake at the state level, raising the net borrowing limit from 0% to 0.35% of GDP, aligning with the federal level.

However, will this series of radical fiscal reform proposals pass smoothly? And how much economic growth can it bring? The market is filled with doubts. Deutsche Bank's report aims to answer these key questions that linger in investors' minds.

Question 1: Will the "Fiscal Rocket Launcher" be Successfully Launched? Political Maneuvering Under Currents

The first question facing Germany is whether these constitutional amendments can pass smoothly. The report points out that the amendments need to gain two-thirds majority support from both the Bundestag and Bundesrat.

Time is of the essence. According to media reports, the Bundestag plans to conduct a first reading of the amendment draft on March 13, followed by a second and third reading on March 18. Although there is no explicit minimum review deadline, lawmakers need sufficient time for discussion and to form opinions, which may delay the voting timeline.

More critically, CDU/CSU and SPD need to gain support from the Greens or FDP to achieve a two-thirds majority. FDP has already clearly expressed opposition, so the key lies with the Greens. Although the leadership of the Greens may agree, considering that the Greens will lose seats at the end of March, it is not ruled out that some lawmakers may attempt to obstruct the vote. To win the support of the Greens, CDU/CSU and SPD may need to make significant concessions on spending priorities in the coming week.

Additionally, the constitutional amendments also need to pass in the Bundesrat. Here, CDU/CSU and SPD will rely on the cohesion of multiple state-level alliances formed with other parties.

Question 2: How Ample is the "Fiscal Ammunition"? Deficits May Soar

If everything goes smoothly, how ample will Germany's "fiscal ammunition" be? Deutsche Bank predicts that by 2027 at the latest, fiscal stimulus will reach 3-4% of GDP This additional deficit spending will initially bring Germany's budget deficit to 5-6% of GDP, and then gradually decrease to around 4% in the medium term as the expected growth effects materialize.

The report analyzes that starting from 2026, fiscal spending will begin to ramp up. First, the increased borrowing capacity of the federal states (approximately 0.35% of current GDP) will release considerable public consumption and investment. Second, the new infrastructure fund is expected to spend steadily over the next decade, increasing deficit spending by EUR 50 billion annually (1.2% of current GDP).

In addition, the increase in defense spending will bring greater fiscal stimulus. Deutsche Bank expects that by 2026, defense spending will rise to 3% of GDP. Compared to the projected spending level of 1.8% in 2025, this means that deficit-financed defense spending will increase by 1.2%.

Overall, by 2027, Germany's total fiscal stimulus could reach around 3% of GDP. However, this is a conservative estimate; if the defense spending target is raised to 4% of GDP, the total fiscal stimulus could be as high as 4% of GDP.

Question 3: Can Economic Growth "Take Off"? Structural Reform is Key

What impact will such large-scale fiscal stimulus have on Germany's economic growth? Deutsche Bank believes that in the short term, the multiplier effect of defense spending may be between 0.4-0.6, while the multiplier effect of infrastructure spending may be around 1. Overall, in the next two years, the fiscal stimulus plan could raise Germany's GDP by at least 2 percentage points.

More importantly, can this fiscal expansion enhance Germany's structural growth rate? Currently, Germany's potential growth rate is only around 0.5%. Large-scale public infrastructure investment is expected to improve this figure by updating the capital stock. Additionally, if defense spending focuses on military R&D, it may also promote productivity growth and technological innovation through spillover effects.

However, the report also warns that without structural reforms aimed at expanding the labor supply, Germany's stagnant labor supply may become a "speed limiter" for the growth of fiscal stimulus. Furthermore, additional supply-side reforms are needed to ensure that the economy's capacity constraints are appropriately expanded.

Question 4: What is the Short-Term Outlook? Moving Forward in "Headwinds"

Although the long-term impact of fiscal stimulus may be significant, Deutsche Bank remains cautious about Germany's near-term growth prospects. The report points out that the cyclical outlook for the remainder of this year will be severely impacted by the uncertainties brought about by U.S. trade and foreign policy.

In this challenging context, Deutsche Bank's growth forecast of 0.5% for 2025 is already considered optimistic. For 2026, the growth forecast of 1.0% assumes moderate fiscal expansion next year, but the global environment is more severe than expected since the U.S. elections.

Despite the downside risks of trade policy, if the large-scale fiscal plan announced this week is implemented, it would mean substantial further upside potential. However, as mentioned above, there are still some execution risks Deutsche Bank AG stated that before adjusting forecasts, it hopes to see the "true face of Lushan" regarding these constitutional reforms and to have a clearer understanding of the pace of infrastructure fund usage.

In summary, whether Germany's "fiscal rocket launcher" can be successfully launched, and whether it can achieve the expected results after launch, remains highly uncertain. However, it is certain that this event will have a profound impact on Germany and the global economy, warranting our continued attention.

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