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 shift
The 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 leading
This 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.