Fueled by debt, the German economy hopes to regain its health

Will opening the spending floodgates be enough to revive flagging growth? Europe's largest economy also needs structural reforms, economists warn.

The winning sectors

For the conservatives of the CDU/CSU and the social democrats of the SPD, who are about to form the new government coalition, restoring the competitiveness of industry is a priority.

Their draft program includes lowering the electricity tax and halving network charges, a measure welcomed by the German Industry Federation (BDI) and awaited by energy-intensive sectors such as chemicals and steel, as well as by the entire network of SMEs that have suffered from soaring electricity costs.

Other guarantees given to businesses: a reform of production taxes and a 25% reduction in costs linked to administrative procedures deemed too burdensome.

The pillars of the agreement between the two parties, a drastic increase in military spending and a special fund of 500 billion euros over ten years to renovate infrastructure - bridges, roads, schools - promise good days for the arms and construction sectors.

The latter could experience a "golden age," according to Stifel analysts, with an 11% increase in annual production and a return to pre-war levels in Ukraine within three years.

To support the crisis-hit automotive industry, the parties want to reinstate "incentives" for the purchase of electric cars, following the abrupt elimination of state aid at the end of 2023.

The reduction of VAT in restaurants from 19% to 7% should help this sector, which has suffered from inflation, but it is "a gift for wealthy households," according to the ZEW economic institute.

Friedrich Merz's conservatives also decided to reinstate the rebate on agricultural diesel, demanded by farmers.

In a context of labor shortages, they are proposing a tax exemption of up to 2.000 euros per month to encourage people to work after the legal retirement age.

The disappointed

The German Greens are threatening to block the giant investment plan due to a lack of spending specifically dedicated to the climate transition.

Some of the measures announced are even "harmful to the environment," points out Claudia Kemfert, an economist at the DIW institute, such as the increase in the allowance paid to motorists for their daily commute to work ("Pendlerpauschale").

According to the FAZ newspaper, the big losers are the "future generations," who will have to deal with the future coalition's refusal to raise the legal retirement age.

"Over the next 15 years, younger people will have to pay an additional 500 billion euros (in the form of contributions) to finance statutory pensions," estimates the liberal daily.

The SPD also had to concede a tightening of the unemployment benefit system, which it relaxed in 2021.

According to the newspaper Handelsblatt, "it's almost a return to Hartz IV," the old system introduced in the 2000s, which was highly controversial for its controls and sanctions on the unemployed.

What effects on growth?

The future coalition's programme aims to ensure that Germany's "growth potential" "returns to significantly exceed 1%", compared to the current 0,4%.

For now, a third consecutive year of recession cannot be ruled out, according to experts. Before the stimulus package, the government was forecasting dismal growth of 0,3% in 2025.

According to the Berlin-based DIW economic institute, the spending stimulus from the €500 billion fund will boost economic performance by around 1% next year and then by more than 2% per year on average from 2027.

But "there is a risk that this fund will be reallocated to consumer spending rather than investment," warns Carsten Brzeski of ING bank.

Friedrich Heinemann of the ZEW research center joins this criticism, accusing both parties of "clientelism."

Debt "will not be enough to solve Germany's weak growth," and the country also needs reforms, Bundesbank President Joachim Nagel stressed on Monday.

The promised investments "should significantly strengthen the German economy" without "definitively returning to vigorous growth," analyses Holger Schmieding of Berenberg bank.

The plan does not set "clear priorities for the use of public money" and proposes "more subsidies than savings," he adds.