Plans by Germany’s prospective leaders to loosen its ‘debt brake’ rule and create a €500 billion special fund for government investment should buoy economic growth, UBS analysts have said.
According to analysts at the bank, reforming the debt brake to exclude defence expenditures above 1% of GDP may add 0.3 percentage points to economic growth.
Ramped government investment could contribute a further 0.5 percentage points to gross domestic product, analysts added.
Chancellor-to-be Friedrich Mertz and other leaders of the CSU/CSU and SPD parties had unveiled the plans on Tuesday.
European markets subsequently rallied across the board on Wednesday, with Germany’s DAX up 3.2% come the afternoon.
UBS added the proposed changes would both free up the federal budget, but also allow for a sustained rise in defence spending without the need for special funds.
“The current government plans were for a moderate increase in defence spending to 2.3% of GDP by 2028,” UBS said.
“Removing the constraints of the debt brake now opens the door to a more substantial increase.
“A historical precedent might be 1957 to 1963, when defence spending was ramped up by 1pp from 3.9% of GDP to 4.9%.”