Germany’s ‘whatever it takes’ moment: Fiscal bazooka ignites market rally
Germany’s €500bn fiscal overhaul is redefining its economy, bypassing debt limits to boost infrastructure and defence. Markets are rallying, with defence stocks surging. Analysts call it a ‘game changer,’ signalling a new era for European growth.
For decades, Germany stood as the poster child of fiscal conservatism, enforcing rigid spending limits and shunning debt-funded stimulus.
Yet, US President Donald Trump’s ambiguous stance on Ukraine and his calls for Europe to shoulder more of its own defence burden have reawakened a sleeping giant.
Germany is embarking on a historic fiscal overhaul that could redefine the European economy, with a €500 billion infrastructure fund and a major defence spending boost set to bypass the country’s stringent debt brake rules.
As investors digest the implications, European equities are soaring, defence stocks are on fire, and economists are calling it a "game changer" for Germany’s long-stagnant growth outlook.
Germany announces unprecedented fiscal shiftThe CDU/CSU and SPD-led coalition is now pushing through an unprecedented fiscal package that includes a €500 billion (11.6% of GDP in 2024) off-budget infrastructure fund that will be disbursed over the next 10 years.
Additionally, defence spending exceeding 1% of GDP will be exempt from the country’s constitutional debt brake, a move that effectively unlocks an additional €11 billion annually.
To further support this shift, the structural deficit allowance for states will be increased from 0.0% to 0.35% of GDP.
The German Bundestag faces a narrow window to pass this sweeping fiscal package before the new parliament convenes on 25 March. At this moment, CDU/CSU and SPD jointly hold the necessary majority to push the reforms through.
A new era for European equities, with defence sector leadingThis radical fiscal expansion is fuelling investor optimism across European markets.
The DAX index has surged 16% year-to-date, outperforming its US counterparts, while defence stocks have emerged as the biggest winners.
The STOXX Europe Aerospace & Defence ETF—tracking major players in the sector—has surged more than 40% year-to-date.
European Commission President Ursula von der Leyen recently described the current moment as a "rearmament era," underscoring the shift towards greater self-reliance in defence.
Shares of Germany’s Hensoldt AG have skyrocketed 112% year-to-date, while Rheinmetall AG is up 95%. French defence giant Thales S.A. has gained 78%, and Italy’s Leonardo S.p.A. has jumped 77%.
“European defence companies continue to outperform, driven by strong fundamentals and growth potential,” said Goldman Sachs in a note titled ‘A New Era for European Equities.’
ABN Amro likened Germany’s fiscal move to former European Central Bank (ECB) President Mario Draghi’s famous "Whatever it takes" moment during the eurozone crisis.
“This is a massive step-change and one that the German economy desperately needs, with the potential to lift German industry out of the structural malaise it has fallen into,” said ABN Amro economist Bill Diviney.
Growth outlook upwardly revised for Germany and eurozoneThe fiscal expansion is also reshaping economic forecasts.
Goldman Sachs has revised its German growth forecasts, now expecting GDP to rise by 0.2 percentage points to 0.2% in 2025, by 0.5 points to 1.5% in 2026, and by 0.6 points to 2% in 2027.
“The €500 billion fiscal stimulus could boost German growth by more than one percentage point per year,” said Carsten Brzeski, ING’s chief economist. “This marks a historic U-turn, with Germany (probably) ditching its debt brake for good.”
Bank of America described Germany’s fiscal overhaul as a "game changer," estimating that growth prospects could reach 1.5% to 2% annually by 2027—far better than the near-zero trajectory previously feared.
The broader euro area is also expected to benefit, with spillover effects lifting GDP by 0.8% in 2025, 1.3% in 2026, and 1.6% in 2027.
The European Central Bank now faces a more complex monetary landscape. With a large-scale fiscal expansion reducing downside risks to growth, Goldman Sachs believes the central bank will need to rethink its rate-cut trajectory.
“We no longer expect a rate cut in July and have revised our terminal rate forecast to 2% in June, up from 1.75%,” the bank said. The fiscal boost, it added, lowers pressure on the ECB to reduce rates below neutral, though near-term risks such as trade tensions with the US remain a concern.
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