German budgetary shift: Toward a 2026 upswing and stronger growth effects
|March 4 will mark the first anniversary of Germany's announcement of its plans for massive investments in defense and infrastructure. The increase in public spending in Germany has already contributed to end the two-year recession (2023-2024) by 2025 – mainly through defense investments, according to our estimates. Infrastructure investments, on the other hand, are currently below the planned amounts. 2026, however, is expected to see a clear acceleration of these programmes, which should bolster a strong pickup in growth and restore Germany’s role as a driving force in the euro area.
Two-speed increase in government spending
Early signs of economic recovery
Note: Infrastructure spending estimates include federal core budget spending and disbursements from the SVIK special fund, excluding transfers to the Länder and municipalities and to the KTF fund.
The Merz government has placed the economy at the heart of its agenda, with a focus on infrastructure and defense, coupled with support for private sector investment. 2025 saw the implementation of the government's strategy, with two major exemptions from the debt brake:
- A special off-budget fund of EUR 500 billion over 12 years dedicated to infrastructure and the low-carbon transition (SVIK);
- An exception from the debt brake on defense spending exceeding 1% of GDP (the goal is to increase defense spending to 3.5% of GDP in 2029, up from 2.4% today).
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