The historic deal struck by Social Democrats (SDP) and the Union alliance of the centre-right CDU and CSU on a massive financial package, including a €500bn special fund (Sondervermögen), is a game changer for the country’s future growth, opening doors for investment, including from pension funds, to revitalise Germany’s economy.
But questions remain on the scale of future GDP growth.
The CDU/CSU and SPD agreed on the financial package and a reform of the debt brake to invest in infrastructure, revitalise the country’s economy, and in turn increase defence spending during negotiations on a possible grand coalition in the next legislative period.
The move follows the country’s general elections last month.
The €500bn special fund, with a lifespan of 10 years, will invest in infrastructure for civil protection, transport, hospitals, energy, education, care and science, research and development, and digitalisation, according to a summary of the negotiations between SPD and Union stating the main points of the political agreement.
Germany will issue bonds to finance the special fund with money that can come from investors, including pension funds.
Germany will amass €1.5trn debt in the next 10 years by setting up the special fund, which is exempt from debt brake rules, and at the same time relaxing debt brake rules, according to the Handelsblatt daily.
CDU/CSU and SPD have in fact agreed to also exempt spending in the defence sector amounting to over 1% of GDP from debt brake rules.
The fiscal policy in Germany is at a turning point, and the actual abolition of the debt brake and the creation of a €500bn special fund are a game changer for investors, according to Wolfgang Bauer, bond fund manager at M&G Investments.
The yield on the 10-year German government bond rose by 0.31 percentage point to 2.79%, the biggest increase in almost 30 years, following the political agreement between the Union and the SPD.
Questions on GDP growth
Annual investments of €50bn over 10 years could increase real total investments by almost 7% by 2034, and GDP by 1%, according to the German Economic Institute (IW).
Ulrich Kater, chief economist at DekaBank, said the positive impact of infrastructure investments through the special fund depends on how money is spent, and growth continues in the future only if infrastructure spending sets in motion an upward spiral.
Annalisa Piazza, fixed income research analyst at MFS Investment Management, said that Germany’s plan is a bold move but, as it stands, does not lead to firm changes in GDP and inflation forecasts.
“Infrastructure and defence spending are expected to be supportive for growth in the medium term. We suspect that, under the assumption of a relatively slow implementation, such a big programme could add about 0.2% of GDP in 2025, 0.5% in 2026 and less than 1% in 2027. Germany could finally get back to potential growth in the coming years,” she added.
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