Germany is about to introduce an earth-shaking fiscal initiative in order to restore the largest economy in Europe. The political parties, who are negotiating to form the next government, have already settled on a €500 billion infrastructure fund and proposed reforms to the country’s borrowing rules, known as the “debt brake.”
This move might be seen as a substantial change in the fiscal policy of Germany which has been traditionally conservative. The suggested measures are coming at a very delicate moment when Germany is struggling with economic stagnation after two years of recession.
The defense budget was the first one to be targeted by the leader of the conservative party and, in all likelihood, the future chancellor, Friedrich Merz. However, he had stressed the urgency of the matter in light of the new dangerous geopolitical situations and the fragility of U.S.-European relations under President Donald Trump.
Their reports already had a good effect on the financial markets. Following the announcement, Germany’s DAX index expanded by 3.4%, which was nearly a record level. Wise words and decisions led shares of Heidelberg Materials to amazing heights of 13% one of their best performances so far.
Export to their clients contributed to the well-being of the defense industry since the expectations of an increase in the military budget made them feel pretty good about the market.
For a long time, economists have been in favor of the reforms in Germany’s fiscal policies that would allow higher levels of investment in infrastructure and innovation. “Debt Brake” which is a tool introduced after the previous global financial crisis in 2008, has been under attack due to its limitation of the economic growth potential in the country.
The euro had reached its four month’s high price according to the news of the proposed reforms, and at the same time German government bonds had experienced the biggest single-day growth in yields since the late 1990s. These developments clearly state that the investors are quite optimistic about the economic future of Germany under the new leadership.
However, barriers continue to exist as the coalition government seeks parliamentary authorization for these measures, which are to be passed with a two-thirds majority vote. The political experts are convinced that in the case of its successful sequel, other European countries will follow their steps if they face similar financial problems.
