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Investing.com — Germany’s proposed fiscal reforms mark a “historic and positive” shift in economic policy, according to Capital Economics analysts.
The reforms, which include increased defense spending, a €500 billion infrastructure fund, and relaxed budget rules for federal states, are expected to loosen the fiscal straitjacket that has constrained German and broader European growth.
However, the firm said in a note that the timing and scale of the GDP boost remain uncertain.
Capital Economics estimates that the fiscal expansion could be around 1-2% of GDP, pushing the budget deficit to 4.5% of GDP, a level not seen outside of crises like the Covid pandemic.
The analysts emphasize that while “these reforms should start to change” Germany’s traditionally cautious investment approach, economic benefits may take time to materialize.
They believe the impact on growth depends on where the spending goes. If allocated to domestic producers, it will “boost demand in a German economy that has flat-lined for the past five years.”
If spending increases imports, “economies in Europe are likely to benefit”, says Capital Economics, with major defense suppliers such as the US and South Korea also gaining.
They add that the reforms could also have broader implications for European fiscal policy. While Germany’s shift may “generate a permissive attitude towards fiscal policy in Europe”, other eurozone countries “have limited space to increase borrowing.”
The European Commission has proposed a €150 billion loan fund to support defense spending, but Capital Economics notes this is significantly smaller than the €750 billion pandemic recovery fund.
Ultimately, while these reforms signal a fundamental shift in Germany’s economic approach, Capital Economics warns that “the associated boost to economic growth may be a bit smaller than many expect, may take some time to arrive, and is unlikely to be replicated to the same extent across other euro-zone countries.”
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