German lawmakers have approved a sweeping fiscal package, championed by chancellor-in-waiting Friedrich Merz, to significantly boost defence and infrastructure spending amid rising geopolitical tensions in Europe.
Dubbed an “XXL-sized” cash “bazooka” by German media, the plan could unlock over €1 trillion in spending over the next decade, marking a historic shift for a nation traditionally wary of large state debt and military expansion.
The package, negotiated by Merz’s CDU/CSU alliance and the SPD, includes a €500 billion infrastructure fund and exempts defence spending above 1 per cent of gross domestic product (GDP) from Germany’s strict debt rules.
Following the announcement, Goldman Sachs raised its 2024 GDP growth forecast for Germany to 0.2 per cent from zero, with further upward revisions for 2026 and 2027.
“Growth could be higher with quicker implementation,” chief European economist Sven Jari Stehn said. “In practice, we think the implementation will be more gradual given capacity constraints and well-known challenges with stepping up public investment.”
Goldman Sachs also expects the spending package to have ripple effects across Europe, adding 0.1 percentage points to its eurozone growth forecast for 2024, which now stands at 0.8 per cent.
“We now expect the rest of the euro area to step up military spending somewhat more quickly in response to the German announcement,” Stehn said.
Namely, it now expects France to raise defence spending to 2.9 per cent of GDP by 2027, with Italy and Spain increasing their outlays to 2.8 per cent and 2.7 per cent of GDP, respectively.
But Stehn cautioned: “We see risks in both directions around our new forecast.
“An across-the-board tariff could imply an additional hit to growth of 0.5 per cent this year.”
Investment opportunities abound
Markets responded to the news out of Germany swiftly, with European equities rallying and defence stocks leading the charge. In particular, the Stoxx 600 gained to reach €555.37 on 19 March, after a period of slightly poorer performance.
Looking forward, in a recent Global X market outlook, Justin Lin said while increased geopolitical uncertainty may spell volatility for other market segments, one thing is clear – investors are hedging their bets on a European military resurgence.
Namely, aside from Germany’s own pro-defence fiscal agenda, the EU earlier this month announced the ReArm Europe Plan/Readiness 2030 – last week renamed to Readiness 2030 – which aims to mobilise up to €800 billion for European defence investments.
Under the wider plan, the EU said its new SAFE initiative will provide €150 billion in EU-backed loans to help Member States strengthen defence capabilities through joint procurement, enhancing interoperability, cost efficiency and the resilience of Europe’s defence industry.
Following the initial announcement earlier this month by European Commission President Ursula von der Leyen, the Stoxx 600 rallied to a record high.
“We are living in dangerous times. Europe’s security is threatened in a very real way. Today I present ReArm Europe. A plan for a safer and more resilient Europe,” she said.
Commenting on how this impacted markets, Lin said: “In the same week as the announcements, the Stoxx 600 Index hit a record high, led by double-digit gains in domestic defence contractors such as Rheinmetall, Saab, Leonardo, and BAE Systems.”
Beyond immediate market moves, structural changes in defence procurement could provide long-term tailwinds for European defence stocks, Lin said.
“As Europe reshapes its military strategy, the defence sector is emerging as an area of opportunity for global investors. If geopolitical risks persist and governments follow through on spending commitments, European equities – particularly in defence – could continue to outshine their global counterparts,” he said.
Meanwhile, Global X research analyst Ido Caspi sees particular opportunities in advanced defence systems and tech infrastructure.
“Despite record military expenditures, globally, defence remains one of the least digitised industries, with less than 1 per cent of global military budgets allocated to software and digital capabilities,” Caspi said.
“Militaries around the world are recognising this gap, leading to an accelerated push toward AI, cyber security and digital warfare.
“In our view, for investors looking to capitalise on this generational transformation of the global defence order, a diversified global approach with a strong focus on defence technology will be key.”
