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Germany towards a "Deutsche vita" era?

2025-03-21 19:45:32Kosova&Bota SHKRUAR NGA REDAKSIA VOX
Germany towards a "Deutsche vita" era?
Germany towards a “Deutsche vita” era

Germany has opened the floodgates for spending to re-equip and revive its economic activity. After a vote by lawmakers earlier this week, the Bundesrat today approved the next government's investment plan, the latest step in an unprecedented budgetary turnaround.

What is changing?

To address geopolitical turmoil, the plan of conservative leader Friedrich Merz, the incoming chancellor, rests on two pillars: a reform of the "debt brake," a constitutional mechanism that limits the country's borrowing capacity, and a giant investment fund for infrastructure.

All defense spending exceeding 1% of GDP will no longer count towards this brake mechanism that limits the government's annual budget deficit.

Berlin is thus killing two birds with one stone: de facto there will no longer be a ceiling on borrowing for military spending, and the government will regain annual budgetary space of almost 20 billion euros by removing the protection from deficit calculations.

The special infrastructure fund will have a volume of 500 billion euros for 12 years, of which 100 billion will be allocated to projects that contribute to the climate transition.

Finally, regional states will be allowed to run deficits of up to 0.35% of German GDP each year.

In total, this represents a colossal stimulus of more than 1,000 billion euros for the next decade.

What does the country need?

On the defense side, the German military "still has too little of everything," according to the annual assessment by Parliament's Defense Commissioner, Eva Högl, even though the shock of the war in Ukraine has shaken things up.

This is the result of decades of underinvestment: Berlin has placed itself under American protection within NATO since 1945 and further reduced its military budget after the end of the Cold War.

German military spending reached 2% of GDP – the NATO target – for the first time last year. A new target of 3% of GDP was mentioned by the defense minister, which would represent approximately 129 billion euros per year based on 2024 GDP.

Long obsessed with budgetary discipline, Germany also needs to modernize its roads, rail networks, schools and hospitals.

Europe's largest economy ranked 27th in the world for infrastructure quality in 2024 in the Global Innovation Index - up from 12th in 2020.

"At least 5,000 bridges need renovation in the country," according to the Ministry of Transport, which estimates the need at 220 billion euros by 2029 for its department alone.

What effects on the economy?

While Europe's largest economy risks suffering a recession for a third consecutive year, the special infrastructure fund could add one more point to growth as early as 2026 and then two points per year thereafter, according to the DIW economic institute.

Berenberg analyst Holger Schmieding estimates that the GDP gain will be more limited, around 0.3 points over the coming years.

The big winners of the budget "bazooka" are arms companies, whose share prices are rising, and the construction sector, which is preparing for a "new golden age."

German industry, which lacks competitiveness, could benefit from a rise in energy costs thanks to planned cuts in electricity and network taxes.

Germany's debt will rise, but at its current level of 63% of GDP – compared to nearly 115% for France – the country still has a comfortable margin.

"Billions of German spending is expected to boost eurozone growth by 0.2 points in 2025 and 0.7 points in 2026," according to Xavier Chapard, an analyst at LBPAM.

What are the limits?

The business daily "Handelsblatt" warns against the illusions of this debt-financed "Deutsche Vita": money alone will not be enough to restore the competitiveness of German industry, which needs to improve its productivity and has a desperate shortage of skilled workers.

"Modern infrastructure is essential for one of the world's largest economies, but it does not in itself drive innovation, transformation or new growth opportunities," said ING analyst Carsten Brzeski.

"The next government will have to implement real structural reforms," ​​he emphasizes.

Another limitation: "Many public institutions lack the capacity and skills to effectively implement large infrastructure projects. Capacity is also limited in the private sector" due to a shortage of manpower, the DIW economic institute points out.

The risk is also political for Friedrich Merz, who made a 180-degree turn after campaigning for budgetary austerity.

The far-right AfD party has repeatedly denounced it as a "financial coup".

(Note: “Deutsche vita” – a play on words with the Italian expression “dolce vita” or “sweet life”)

 


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