Germany: a fiscal stimulus at €850bn over the next five years

This afternoon, the German Chancellor gave a speech at the Bundestag to discuss foreign policy in which he reaffirms Germany’s support for Israel and Ukraine, condemning the Kremlin regime, and emphasizing Germany's commitment to preventing Iran from acquiring nuclear weapons. Most of his intervention was about mentioning the "new reality" that Germany must confront ahead of the NATO summit, where alliance’s members are expected to announce an increase in their defense spending target to 5% of GDP, divided into 3.5% for core defense, such as troops and weapons, and 1.5% for broader defense and security-related investments. On this topic, Finance Minister Lars Klingbeil presented t o the government and the budget commission of the B u ndestag the mid-term financial plan for the upcoming years, as well as the draft budget for 2025, which has been approved. Germany aims to achieve its 3.5% in defense spending by 2029. Among the elements in this mid-term financial plan , defense spending is set to rise significantly, increasing from €91 bn in 2024 to €95 bn in 2025 and projected to reach €162 bn by 2029. This budget includes funds from the special military fund amounting to €24.1 bn in 2025 and €25.5 bn in 2026. The increase in defense spending is expected to account for nearly half of the new borrowing, which is anticipated to reach around €400 billion. Public investments are expected to rise by 55% in 2025. Regarding investments, the draft indicates that they will increase to €115.7 bn in 2025 and €123.6 bn in 2026, compared to €74.5 billion recorded in 2024, representing an increase of nearly 55% between 2024 and 2025. New net borrowings should rise to €847 billion, marking a 30% increase in general government debt, or an increase of 18% of GDP. According to the government, the federal government's financing needs are expected to reach €81.8 billion (or 1.9% of GDP) in 2025, €89.3 billion in 2026, and is supposed to reach €126.1 billion by 2029. Overall, it is anticipated that the total amount of new borrowing will reach €847 billion by the end of the legislative term in 2029. What’s next? T his plan still needs to be approved by both parliamentary chambers. In this regard, we expect the draft for 2025 to be validated by September, the impact of this plan to kick in as from Q4 of this year, while the budget for 2026 will follow a standard process , i.e. a draft approved by the government end of July, initial discussions in Parliament in September and a vote in November.