Can increased spending save the German economy?

Future German Chancellor Friedrich Merz reached a deal with the Green Party on March 14, hoping to create a 500 billion euro fund for defense and infrastructure spending.

Can increased spending stimulate Germany's struggling economy ?

Future German Chancellor Friedrich Merz reached an agreement with the Green Party on March 14 on a sharp increase in state borrowing, just days before a German parliamentary vote on the issue.

The cross-party deal that hopes to form Germany's new government includes a special 500 billion euro (about $545 billion) fund for infrastructure and a plan to scrap national debt limits on defense spending.

The IfW research institute forecasts the economy will grow 1.5% in 2026 thanks to increased public spending. Illustration photo

The increased spending could stimulate Germany's struggling economy, economists say. The planned infrastructure fund could boost economic growth by more than 2 percentage points a year on average over the next 10 years, according to Germany's DIW Economic Institute.

With the agreement to increase spending on defense and infrastructure, Germany's growth is forecast to reach 2.1% in 2026, instead of 1.1%, according to DIW.

Another German research institute, IfW, has also revised up its forecast for Germany's economic growth in 2026. It predicts the economy will grow by 1.5% thanks to increased public spending.

The IMK economic institute, which has not yet updated its forecast, sees the German economy growing by just 0.1% this year, after two consecutive years of recession in 2023 and 2024, but said the new proposals could make a big difference.

"If the fiscal package is implemented quickly, we can expect the economy to grow strongly in the second half of the year and German growth this year could come out of stagnation ," said Sebastian Dullien, IMK's economics director.

Which industries will benefit most?

Germany's construction industry will benefit from the fund, which is aimed at improving Germany's crumbling infrastructure. Shares in building materials maker Heidelberg Materials rose about 4% on March 14. Shares in engineering and industrial services provider Bilfinger rose 4.8% and shares in Germany's largest construction company, Hochtief, rose 5%.

The defense industry will also benefit. Under the plan to increase state borrowing, Germany's strict debt limit will be amended in the constitution. This will allow Germany to increase defense spending without being constrained by the current debt limit.

German defense companies Rheinmetall, Hensoldt, Thyssenkrupp and Renk posted gains of between 4.5% and 7.5% on March 14 after news of the deal was announced.

The infrastructure fund Germany plans to create could boost economic growth by more than 2 percentage points a year on average over the next 10 years. With the agreement to increase defense and infrastructure spending, growth is forecast to reach 2.1% in 2026, instead of 1.1%, according to the German Economic Institute DIW.

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