Germany’s economy managed to grow by 0.2% last year, the first year of expansion since the post-pandemic surge in 2022.
This growth reflects the easing of the German debt brake and rising outlays on national security and infrastructure as the economy absorbs a second China shock.
It’s important for the European Union and United States for multiple reasons.
First, Germany is the largest economy in the EU and an important trade partner for the U.S.
Second, the EU needs to become the most important barrier to Russian aggression, with the safety of bordering states at stake.
Third, just as the decrease in German manufacturing signaled the effect of China’s aggressive expansion of exports, the recent increase in orders for German manufacturers suggests that Germany now accepts the need for an aggressive fiscal policy, and not austerity, to get out of its malaise.
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In addition, Europe finds itself needing to rearm to confront Russia as the U.S. turns away from the NATO alliance.
Events of recent days have shown that Europe’s challenge is not just from Russia anymore. Aggressive posturing from the U.S., as evidenced in its threats over Greenland, will lead Europe, led by Germany, to go its own way on matters of economics, finance and security.
This change includes the previously unthinkable acceptance of higher spending on the German military and willingness for the EU to take on debt even after the 2010-12 European debt crisis.
In March, a two-thirds majority of the Bundestag voted to exempt spending on security from Germany’s strict debt rules, while creating a $547 billion infrastructure fund.
By December, Chancellor Friedrich Merz was asking for universal service requirements, with reports of increased production of munitions and startups of AI systems in the private sector.
The takeaway
Economists are forecasting Germany’s budget deficits to move away from the grip of austerity to accepting deficits reaching 3.8% by next year.
While the impact of fiscal spending on defense and infrastructure does not happen overnight, the need to increase both military and infrastructure spending has become apparent for Germany’s private and public sectors.
The growth of Germany’s manufacturing orders in the second half of last year lends support to the need for fiscal programs when a shock has affected economic growth.
