German Prime Minister Friedrich Merz is working on the Bundestag during a discussion on the 2025 federal budget held in Berlin, Germany on September 17, 2025.
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The huge investment pledge and major financial changes have strengthened hope that Germany can give a much-needed boost to the eurozone economy, but economists are beginning to wonder if and when that will happen.
Germany was a hub of excitement earlier this year, with many politicians, analysts and economists sharing great hopes for economic rebounds.
It moved to amend long-standing debt braking rules, which limits how much debt the government can take on and determines the size of the federal government’s structural fiscal deficit. Certain defense and security costs exceed certain thresholds will be exempt from the debt brakes under the new regulations.
The country has also chosen to create a 500 billion euro ($59.2 billion) infrastructure and climate investment fund.
This shift was seen as a potential game changer at the time and was widely billed as a way to change the slowdown in Germany’s economy.
The country recorded annual contractions in both 2023 and 2024, and 2025 has also started off in a calmer position. According to the latest data, GDP rose 0.3% in the first quarter, but fell 0.3% over the next three months.
The eurozone economy is also struggling with a wider and growth of 0.6% in the first quarter, slowing to just 0.1% over the next three months.
Martins Kazak, a member of the European Central Bank Management Council, told CNBC earlier this month that “the big hope is in Germany” when it comes to fiscal spending that will boost the Eurozone economy next year.
However, it is becoming increasingly unclear whether this will happen.
“In Germany, it takes time to spend money.”
Berenberg’s chief economist Holger Schmieding told CNBC that “massive rise” in defense orders and infrastructure investments have begun in Germany.
“(But) we haven’t seen it strongly in the actual output data yet,” he said.
“Overall, everything is progressing as expected after the major debt brake reform. Actual spending is slower than many more exciting experts expected. In Germany, it takes longer to spend money.”
Meanwhile, Franziska Palmas, a senior European economist at Capital Economics, has flagged “a much higher deficit” in Germany over the next few years as a result of a splurge in spending, resulting in some potentially unexpected results.
“What’s probably a little unnoticed is that the government is not only increasing its defense and infrastructure spending, but also using some of its additional financial space to fund other spending,” she said.
This includes, for example, covering the costs of pensions, healthcare and social benefits as well as funding for power cuts for businesses.
“Things like electricity cuts still have a positive effect on the economy, but additional spending on healthcare and pensions does not increase the economy as it reflects rising costs due to demographics,” Palmas noted.
Palmas said the change would help Germany’s economy grow in 2026, but she warned that expansion may not be as strong as many economists expect.
Minimal boost?
Major German economic institutions have recently cut the country’s economic forecasts, and now expect growth of more than 1% next year.
Meanwhile, the European Central Bank expects the eurozone to increase by 1% in 2026.
Berenberg’s Schmieding said that Germany’s fiscal stimulus measures add about 0.3 percent points to the country’s growth rate, increasing the eurozone economy by 0.1 percent points.
Meanwhile, Palmas is seeing Germany’s growth increase by around 0.2% in the 2026 Eurozone.
Beyond Germany, several other factors are set to affect the growth of the eurozone next year. According to Palmas, it includes recent interest rate cuts from the ECB and strong growth from Spain, driven by growth in immigration and employment.
“On the other hand, US tariffs are likely to be a slight economic resistance (I think it will subtract about 0.2% from GDP),” she said. “And in France, the tightening of fiscal finances will also place an emphasis on growth.”
However, Germany’s rebound should have a knock-on effect that exceeds GDP alone, Schmeading noted.
“The German transition to significant growth from late 2024 to late 2025 will have a modest positive impact on its neighbors. After all, Germany is usually their most important trading partner.”
