Germany prepares €500bn infrastructure fund to transform ailing economy #NewsGerman

After decades of economic decline and underinvestment, a revival in Germany’s industrial fortunes could benefit the entire European continent.

The global economic slowdown and US president Donald Trump’s tariff threats have given countries around the world a wake-up call. Germany stands out amid this upheaval, having recently modified its constitution to ease its debt brake.

The next challenge for Germany is a historical lack of investment in infrastructure. The country’s recently announced fiscal stimulus package promises to turn this around and create major investment opportunities in the process.

The reboot

German lawmakers have passed a historic spending package, marking the end of decades of restrictive budgetary policies. The bill, backed by chancellor-in-waiting Friedrich Merz, establishes a €500bn ($541bn) infrastructure fund to be allocated over the next 12 years, with 20 per cent focused on green transition initiatives.

Additionally, defence spending exceeding 1 per cent of GDP will be exempt from the constitutional debt brake, allowing for increased military funding. The agreement also extends defence spending to include support for Ukraine, civil protection, information technology and intelligence agencies.

This comprehensive approach represents a break from past fiscal conservatism and aims to modernise Germany’s military and infrastructure capabilities and revitalise the struggling German economy after two years of contraction and a historical investment shortfall. Markets have already responded positively, with the DAX hitting a record high and German bond yields rising in anticipation of increased borrowing.

Having now received approval by Germany’s federal states, the plans could redefine Germany’s economic and military role in Europe and accelerate the construction of a common European defence system. However, this package is not focused on Germany’s investment potential but rather on rebuilding what has ‘stopped working’ after decades of underinvestment.

Fiscal firepower

Germany’s proposed infrastructure fund represents a substantial fiscal policy shift, moving away from traditionally strict debt constraints to address urgent infrastructure needs. Economists estimate Germany could raise its debt-to-GDP ratio to 86 per cent over the next decade, creating up to €1.9tn in ‘fiscal space’ without harming economic growth.

The federal government will receive €300bn to finance national infrastructure projects, while state governments have been allocated €100bn for regional infrastructure initiatives. Additionally, €100bn has been designated for the Climate and Transformation Fund (KTF), which will focus on climate action and energy transition projects.

The investment plan targets key sectors to enhance national development. In particular, transport networks will be modernised and expanded, while new sustainable energy infrastructure will support the transition to cleaner power. Digital infrastructure and services will also be improved, alongside modernisation of hospitals and healthcare facilities. Finally, increased education funding is aimed at strengthening schools and research institutions, while investments in civil protection attempt to bolster defence and emergency response capabilities.

Sustained stagnation

This new fiscal approach comes in a challenging economic context — Germany has not experienced sustained growth since the Covid-19 pandemic. While former chancellor Olaf Scholz has drawn particular criticism for this, Germany’s problems run far deeper, stemming from decades of economic decline and chronic underinvestment.

The country has long been praised for the quality of its infrastructure but now faces a worrying deterioration in its transport and communication networks. Its aging railway network struggles to meet national demand, with increasing train delays and cancellations. Deutsche Bahn, Germany’s national railway company, estimates €45bn is needed for modernisation.

Road infrastructure isn’t in much better shape: 4,000 bridges require urgent renovation, according to former transport minister Volker Wissing, while highways show advanced signs of deterioration. A €27bn, 10-year programme had been launched to modernise the rail network and create 40 high-speed corridors, but its financing remains uncertain following the German government’s collapse in 2024, casting doubt on the projects’ realisation.

On top of that, Germany faces a striking technological lag: 82 per cent of German businesses were still using fax machines in 2023, and the country has one of the lowest fibre broadband penetration rates among OECD nations. In a context of heightened global competition, this digital deficit could weigh heavily on Germany’s economic competitiveness.

Investment opportunities

Germany’s modernisation and reconstruction will create a wealth of opportunities for companies — and investors — across a wide range of sectors. The modernisation of transport networks could benefit companies including Alstom, Siemens Mobility, Vinci and Hochtief, while businesses like RWE, Orsted, Siemens Energy and Schneider Electric could benefit from increased spending on renewable infrastructure.

Digitalisation efforts could support sector leaders like Deutsche Telekom, Nokia and Atos. Meanwhile, in the healthcare sector, the modernisation of hospital and healthcare facilities could serve as a tailwind for companies including Fresenius, Philips, and Siemens Healthineers. Finally, investment in schools and research facilities in education could benefit firms like Dassault Systèmes and SAP.

While long overdue, this fiscal transformation could reboot Germany’s economy and reinforce the country’s leadership role in Europe, creating significant opportunities for companies in the transport, energy, and digital sectors. Questions remain over whether further adjustments to the plans will be needed, but this stimulus has the potential to spark a virtuous cycle of growth in Germany and across Europe.

John Plassard, senior investment specialist, Mirabaud Group