Germany’s economy has long been stagnant. With real GDP up just 0.3% since the fourth quarter of 2019 (versus a 12.0% gain in the US), it was beginning to look again like the ‘sick man of Europe,’ a label it acquired in the late 1990s. The country has been buffeted since Covid by multiple shocks: the war in nearby Ukraine and higher energy prices, US President Donald Trump’s trade policy and rhetoric, and electoral gains by populist parties.
Newly elected Chancellor Friedrich Merz came to power in May and has ambitions to revitalise the economy. In his short term at the helm, he has advanced several initiatives to reinvigorate Germany’s corporatist model. He has seemingly been following many of the prescriptions laid out by Mario Draghi in his seminal report on EU competitiveness published in 2024 to promote risk taking and investment leading to higher productivity and increased competitiveness. The latest of these is Merz’ Made for Germany initiative, in which more than 60 companies have pledged to invest €631bn (US$743bn) over the next three years. The funds are intended for research and development as well as increased capex via new and upgraded factories.
Merz first secured a revision to the German constitution before even taking office by removing limits on defence spending and creating a novel €500bn (US$589bn) fund to refresh infrastructure over the next 12 years. Germany has long been hesitant about large-scale federal debt financing owing to the hyperinflationary experience it endured in the 1920s that led to the political rise of the National Socialists. As a result, Germany’s current debt-to-GDP ratio stands at a comparatively sober 63% versus 122% in the US, 111% in France and 98% in the UK. So, it was a significant move for the incoming chancellor to promote an amendment to the constitution’s debt-brake.
Booming defence spending to support the greater economy
The war in Ukraine has re-awakened Germany to the possibility of armed conflict in Europe and the need to protect their homeland.
For its part, the Trump administration has arm-twisted America’s NATO allies into increasing their defence spending. This resulted in assurances at the 2025 summit in the Hague that by 2035 NATO members would contribute 5% of GDP to defence spending, divided between 3.5% in spending directly tied to defence and 1.5% of indirect defence expenditure. This represents a fairly aggressive change from a previous commitment to spend 2% of GDP on defence.
At the same time (and likely a factor in NATO members’ willingness to increase their own spending) Trump’s sometimes-isolationist rhetoric has raised fears in Germany that the US security umbrella could prove lacking.
The increase in defence and infrastructure spending is a net positive for the entire economy and particularly for firms that operate within those sectors of the economy, as it may give them pricing power. This investment surge can also be expected to increase capacity at a time when the automobile sector remains under global competitive pressures. The new investment in defence will further support opportunities our teams have been invested in.
The irony is that if Merz succeeds, it will be in part thanks to an American president who is very unpopular with Germans. And that is because Merz’ deficit-funded, expansionary plans and increase in defence spending are a direct response to the need for national defence self-sufficiency; these measures are also necessary to compete with the US and Trump’s ‘One Big Beautiful Bill.’
Germany’s coalition government further intends to spur deregulation efforts. One item of particular importance to Merz has been the rollback of EU and German red tape and laws that promote ethical supply chains.
Whether all of Chancellor Merz’ measures succeed or not, they represent an ambitious effort to get the German economy back on track. Achieving that would be a boon for the rest of Europe and for the global economy as well. Time will tell if the reforms are the real deal. Germany’s DAX index is up 39% year-to-date; investors like what they’ve seen so far.
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