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What Germany's planned expenditure spree might mean for the economy

What Germany's planned expenditure spree might mean for the economy

On Tuesday, the lower house of Germany's parliament will vote on a massive increase in borrowing. This could help boost Europe's biggest economy and spur growth throughout the region.

German chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on Friday on a massive increase in state borrowing, just days before a parliamentary vote on the issue.

The parties hoping to form the next government have agreed to create a special infrastructure fund of 500 billion euros ($545 billion), and to remove the debt restrictions on defence investments.

What the future plans for Europe's biggest economy could mean in terms of growth and debt:

Could the spending boost Germany's ailing economy?

According to economists yes, according to the economists

The German DIW Economic Institute said that the planned infrastructure fund could alone increase economic output by more than two percentage point per year in the next ten years.

DIW stated that a growth rate of 2,1% in 2026 is now expected instead of the previous 1.1%.

A second institute, IfW, also revised its growth estimate for Germany in 2026, predicting a 1.5% expansion on the backs of expected increases in public expenditure.

In its report for the month of January, the Economy Ministry said that fiscal policy plans can help to stabilise expectations and give planning security.

WHICH SECTORS ARE SET TO PROFIT MOST?

Construction can benefit from the fund set up to upgrade Germany's crumbling infrastructure.

Also, the defence industry stands to benefit. The "debt-brake" - a strict limit on German borrowing imposed by the current coalition – would be removed from the constitution. This would allow for higher defence budgets.

How much more debt will Germany take on?

Lots.

The debt ratio of Germany was 64% of its gross domestic product last year. This is lower than other industrialised countries like the United States or France.

Joerg Kraemer, chief economist at Commerzbank, expects this level to rise by 10 percentage points in the next few years due to the special fund created for infrastructure.

If defence spending was increased to 3.5% of GDP, the debt ratio would increase by 2.5 points per year.

Kraemer stated that the government debt ratio in 10 years could reach 90%. However, this is also dependent on inflation, and therefore, not easy to predict.

Friedrich Heinemann, a ZEW economist, said: "Germany would then quickly join the EU's most indebted countries." He predicted that Germany's debt could reach 100% in 2034.

WHAT WOULD THIS DO TO GERMANY'S TRIPLE A CREDIT RATING

Not necessarily. Eiko Sievert, a Scope analyst, said that the spending plans may increase Germany's level of debt to 72% of its gross domestic product in 2029. This is below the previous record of 80%, which was set after the global financial crises of 2010, when Germany maintained its AAA rating.

Sievert stated that the future of this possibility depends on the implementation and success of the necessary reforms in politics to boost competitiveness and economic development.

CAN GERMANY FIND SUFFICIENT LENDERS?

Germany is a popular borrower because of its top credit rating. German government bonds would need to be more attractive to investors if they are to continue to be so.

Kraemer, Commerzbank, says that investors are likely to demand a higher risk premium for German government bonds.

Could Germany's Spending Spree Influence ECB Policy?

It is possible that the injection of hundreds of billions in the German economy, as well as the wider euro zone economy, could lead to inflation.

The ECB must take into consideration that inflationary pressures will increase again due to the planned expansionary fiscal policies in Germany, said Cyrus de la Rubia. Chief economist at Hamburg Commercial Bank. Reporting by Rene Wagner and Maria Martinez, Writing by Rachel More, Editing by Gareth Jones Christina Fincher, Tomaszjanowski

(source: Reuters)