Germany Changes Constitution to Increase Defense Spending
Germany has made a historic decision to amend its constitution and exempt defense and security expenses from the current budget rules. This move comes in response to the incoming Chancellor Friedrich Merz’s promise to do “whatever it takes” to defend the country, as well as a direct response to the wavering support from Donald Trump’s administration. The White House has made it clear that the long-term presence of the US military in Europe cannot be taken for granted.
The amendment theoretically allows Germany to invest unlimited funds in defense. Currently, Germany spends about 1.5% of its GDP on defense, but many experts believe that figure could double, leading to investments of well over 1,000 billion euros over the next decade.
In addition, Germany will launch a 500 billion euro fund for investments in climate transition and infrastructure over the next 12 years. This shift to an expansionary fiscal policy is expected to revive Europe’s largest economy, which has experienced two consecutive years of contraction.
“Tomasz Wieladek, Europe’s chief economist at T. Rowe Price, describes this as a monumental shift that may only occur once in a generation,” highlighting the significance of Germany’s departure from its traditional budget discipline stance. He also notes that the expenditure package surpasses the Marshall Plan, the US aid for Europe’s post-World War II reconstruction.
The German economic institute DIW projects that the infrastructure fund alone could boost the country’s GDP by more than 2 percentage points annually over the next decade. Grant Cheng, a fund manager at Allianz Global Investors, sees these stimuli as potentially initiating a trend shift, with European growth and stock markets catching up to the US after a prolonged period of lagging.
Cheng identifies sectors like defense, banking, industrial, and construction companies as potential beneficiaries of the investment boom. He points to companies like Siemens that could profit from infrastructure spending.
However, Wieladek warns of potential risks associated with these investments. He anticipates a resurgence of inflation and the initiation of a new interest rate hike cycle in Europe within a few years due to the significant fiscal stimulus. This could pose challenges for countries like Italy and France, already grappling with debt issues, and raise concerns about financial stability.
As Germany embarks on this ambitious fiscal policy shift, it remains to be seen how these investments will impact not only the country’s economy but also the broader European financial landscape. With potential economic growth and market implications, the repercussions of Germany’s constitutional change are poised to reverberate across the region.