Quick view: Germany’s bold leap
Portfolio Manager Robert Schramm-Fuchs responds to seismic plans to loosen Germany's debt rules, allowing increased spending on defence and a major infrastructure plan to boost growth.
3 minute read
Key takeaways:
- The Christian Democratic Union (CDU) and the Social Democratic Party (SPD) have agreed to propose an amendment to Germany’s borrowing rules, enabling increased spending on defence and infrastructure over the next decade.
- Despite expected hesitations from the Green and Liberal parties, the proposal, led by Chancellor-in-waiting Friedrich Merz, is anticipated to gain enough parliamentary support to pass.
- This strategic financial manoeuvre is viewed optimistically by the markets and is part of a broader vision for Germany to reassert its leadership in Europe, driving reforms and responding to external pressures with transformative changes.
Preliminary talks between the Christian Democratic Union (CDU) and Social Democratic Party (SPD) – the two parties hoping to form Germany’s next government – have yielded early results. In what amounts to a potentially seismic shift, the two parties agreed to lead constitutional changes to overhaul borrowing rules, reforming and loosening Germany’s ‘debt brake’.
The next step is for Germany’s Chancellor-in-waiting, the CDU’s Friedrich Merz, along with the SPD, to bring that proposal to Germany’s parliament. Although spokespeople from the Green and Liberal parties – which will not be part of the next government – have signalled hesitation, we suspect that there will ultimately be enough support to get the proposal over the line.
The agreement would exempt defence spending above 1% of GDP from the debt brake limit (effectively enabling the government to increase military spending as required) and open the door to a €500 billion (US$535 billion) financial infrastructure package aimed at overhauling the economy, with release of the funds over a 10-year period. If approved, we would expect the government to take some time to identify and prioritise projects, so would expect to start seeing the impact of that spending filtering through to the economy in 2026.
Germany’s debt position is currently relatively healthy, with federal debt to GDP around 61%, so these packages would add perhaps 20 percentage points to that debt level (currently a crude estimate). Markets responded positively to the news and, given the very low relative valuation starting point for European equities, we think it is possible that further news could help to sustain a positive shift in investment sentiment towards the region.
We are hopeful that a new German government under Chancellor Merz will prove much more dynamic than its predecessors. Germany needs to take on a leadership role again to drive reform in European institutions and in the European project itself, a process that we believe is underway. Over the past few months, we have seen the European Commission working on reduce supply chain law, sustainability reporting, CO2 border tax and taxonomy. We have seen consultation on the securitisation market, a softening of the auto industry emissions target, and a ‘coalition of the willing’ to support Ukraine. Our hope is that the vast external pressures from friends and foes onto Europe will serve to catalyse change and improvement that might have been otherwise unthinkable.
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Glossary:
GDP: Gross domestic product – the value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more, and businesses may be expanding, and vice versa. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.
Debt to GDP: A measure of how much debt a country has relative to its GDP, usually expressed as a percentage.
Germany’s debt brake: Legally binding for Germany’s federal government since 2016, and the country’s 16 states since 2020, the debt brake puts strict limits on borrowing. While there is an outright ban on debt for the states, the debt brake left some leeway for the federal government to spend during exceptional times and take on a small amount of borrowing in normal times.
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Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
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- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
3 minute read
Key takeaways:
- The Christian Democratic Union (CDU) and the Social Democratic Party (SPD) have agreed to propose an amendment to Germany’s borrowing rules, enabling increased spending on defence and infrastructure over the next decade.
- Despite expected hesitations from the Green and Liberal parties, the proposal, led by Chancellor-in-waiting Friedrich Merz, is anticipated to gain enough parliamentary support to pass.
- This strategic financial manoeuvre is viewed optimistically by the markets and is part of a broader vision for Germany to reassert its leadership in Europe, driving reforms and responding to external pressures with transformative changes.
