Germany’s ‘whatever it takes’ moment: Fiscal bazooka ignites market rally

For decades, Germany stood as the poster child of fiscal conservatism, enforcing rigid spending limits and shunning debt-funded stimulus.

Yet, US President Donald Trump’s ambiguous stance on Ukraine and his calls for Europe to shoulder more of its own defence burden have reawakened a sleeping giant.

Germany is embarking on a historic fiscal overhaul that could redefine the European economy, with a €500 billion infrastructure fund and a major defence spending boost set to bypass the country’s stringent debt brake rules.

As investors digest the implications, European equities are soaring, defence stocks are on fire, and economists are calling it a "game changer" for Germany’s long-stagnant growth outlook.

The CDU/CSU and SPD-led coalition is now pushing through an unprecedented fiscal package that includes a €500 billion (11.6% of GDP in 2024) off-budget infrastructure fund that will be disbursed over the next 10 years.

Additionally, defence spending exceeding 1% of GDP will be exempt from the country’s constitutional debt brake, a move that effectively unlocks an additional €11 billion annually.

To further support this shift, the structural deficit allowance for states will be increased from 0.0% to 0.35% of GDP.

The German Bundestag faces a narrow window to pass this sweeping fiscal package before the new parliament convenes on 25 March. At this moment, CDU/CSU and SPD jointly hold the necessary majority to push the reforms through.

This radical fiscal expansion is fuelling investor optimism across European markets.

The DAX index has surged 16% year-to-date, outperforming its US counterparts, while defence stocks have emerged as the biggest winners.

The STOXX Europe Aerospace & Defence ETF—tracking major players in the sector—has