On March 5, 2025, German Chancellor designate Friedrich Merz issued a statement in Berlin, announcing that he would promote Germany's largest post-war fiscal policy shift-breaking through the restrictions of the "debt brake" mechanism by amending the constitution and establishing a 500 billion euro infrastructure fund and excluding defense spending from fiscal disciplines.This series of policies not only marks the end of Germany's traditional fiscal conservatism, but is also likely to become a turning point in the reshaping of the European economic landscape.

Merz's statement directly responded to the plight of Germany's continued economic recession.Germany's GDP will shrink by 0.2% year-on-year in 2024. This is the first time since 2003 that two consecutive years of negative growth. Problems such as weak industrial exports, high energy prices, and aging infrastructure are intertwined into a structural crisis.The core logic of this policy shift is to activate economic momentum through unconventional fiscal stimulus.The 500 billion euro infrastructure fund will focus on transportation, energy networks and housing, which is equivalent to 12.5% of Germany's GDP, far exceeding the 100 billion euro defense fund set to respond to the Ukraine crisis three years ago.Robin Winkler, chief economist at Deutsche Bank, called the move "Germany's most historic paradigm shift after the war" and expected the plan to push the economic growth rate upward from 1% in 2026.

The deeper policy logic is rooted in geopolitical changes.The Trump administration's diplomatic shift to suspend military aid to Ukraine and promote direct negotiations between the United States and Russia has forced Europe to reassess its security autonomy.Mertz put forward the slogan of "defend the country at all costs" and plans to increase defense spending to more than 2% of GDP and bypass debt limits through special funds.This strategy of tying security needs to fiscal expansion is not only a stress response to U.S. strategic contraction, but also implies the intention of driving economic growth through the military-industrial complex.It is worth noting that the Bundesbank has proposed to increase the federal government's borrowing limit from 0.35% of GDP to 1.4%. If this plan is implemented, Germany can borrow an additional 220 billion euros in debt in the next five years, providing more room for policy implementation.

The immediate market response to Germany's fiscal shift was contradictory.The euro surged to 1.0684 against the U.S. dollar after the news was announced, a three-month high, reflecting investors 'bets on Europe's economic recovery; but German government bond futures fell sharply, signaling market concerns about the expansion of debt.The stock market was structurally divided: defense stocks continued their gains, the aerospace and defense index rose 3.5% in a single day, and Deutsche Bank's share price surged 9%, reflecting capital's pursuit of policy dividends.However, Barclays equity strategists warned that there is a time lag in infrastructure investment in employment and the industrial chain, and about 60% of defense spending may flow to U.S. arms dealers, which doubts the boost effect of Germany's domestic economy.

The political risks of policy implementation cannot be ignored either.Amending the constitution requires a two-thirds majority of parliament, and the increase in seats for far-right and far-left parties in the new parliament may pose constraints.Although Merz attempts to use the current parliament, which has not yet been dissolved, to advance legislation, the Social Democratic Party's asking prices in areas such as immigration policy and social welfare may dilute reform efforts.Historical experience shows that the German government's cabinet formation negotiations may last for several months. In 2017, Merkel took half a year to complete the formation of a coalition government. Uncertainty during the policy window may weaken market confidence.

From a broader European perspective, Germany's fiscal expansion resonates with the EU's plan to "rearm Europe".European Commission President Von der Leyen recently announced that he would mobilize 800 billion euros to build a security line, which has a synergistic effect with German policies.Karsten Brzeski, global macro director at ING, pointed out that Europe is undergoing historic changes, and Germany's move may trigger a chain reaction-France has said it will reassess the fiscal pact, and Italy plans to launch a local version of the infrastructure fund.If fiscal policy coordination at the EU level is formed, it may hedge the impact of U.S. trade protectionism. According to calculations by the Bundesbank, the U.S. -European trade war may cause Germany's economic growth to drop by 1.5 percentage points in 2027.

However, the long-term risk lies in the irreversibility of fiscal discipline.Germany's "debt brake" mechanism written into its constitution in 2009 was originally intended to restrict the spread of the debt crisis in southern European countries, but now it has become a shackle for its own development.Policymakers need to find a balance between stimulating the economy and preventing debt risks, especially considering that Germany's aging rate has reached 22%, and future social security spending pressure may squeeze investment space.Olivier Blanchard, former chief economist of the IMF, warned that after the debt-to-GDP ratio of developed countries exceeds the warning line of 120%, interest rate sensitivity will increase exponentially. Although the current benchmark interest rate in the euro zone remains at 3.25%, the policy shift may trigger fluctuations in the bond market.

The ultimate success or failure of this fiscal experiment may depend on the efficiency of capital use.A report from the German Federal Audit Office shows that 43% of government investment projects in 2023 have budget overruns or schedule delays, and digital infrastructure failure cases highlight the inefficiency of the bureaucratic system.If the 500 billion euro fund fails to establish a transparent project screening mechanism and introduce private capital participation, it may repeat the mistake of "Deutsche Railway's delay dilemma".However, Siegfried Ruswum, chairman of the Confederation of German Industries, said that the business community is ready to take orders and it is expected that the first batch of transportation project tenders will be launched in the fourth quarter of 2025, which provides an early observation window for the policy's effectiveness.

When politicians in Berlin broke a sixteen-year-old fiscal dogma, they were betting on Germany's credibility as Europe's economic stabilizer.Behind this gamble is not only the urgent need to fight the economic recession, but also the strategic choice to reconstruct Europe's geographical landscape.As Merz declared at a press conference: "We are writing a new chapter in German economic history"-the title of this chapter may be "Crisis-Driven Rebirth" or "Debt-Supported Prosperity"-the answer will be hidden in the angle between the German manufacturing PMI curve and the 10-year government bond yield over the next three years.