“It’s all different now,” as Chancellor Olaf Scholz said in his address to the Bundestag, the German parliament, three days after the beginning of the Russian invasion of Ukraine in 2022. He said we were living through a Zeitenwende,1 or a “turning point in time,” demanding radical action such as an urgent investment in the armed forces. Western allies were delighted, because they interpreted this to mean Berlin was getting serious about re-arming. However, as the glacial pace of change has demonstrated, no radical change is possible without a radical rethink by Germans of Germany’s place in geopolitics and geoeconomics. Now, with a new coalition government literally days away from taking power, this rethink appears to have happened.
Germany is the third-largest economy in the world and the biggest in Europe, historically driven by a powerful host of industrial companies that export successfully across the world. The policy direction taken by Germany in the next four years will set parameters for the European Union (EU) and, by extension, have a significant impact on the global economy.
For investors, the top issues have been anemic economic growth, weak productivity, the constitutional obstacle to issuing debt (which is badly needed for public investment in infrastructure and defense) and Germany’s vulnerability to potential tariffs on exports to the United States at a time of worsening EU relations with China.
But the unconventional approach taken by Friedrich Merz, the probable next Chancellor of Germany, has blown the cynics out of the water. The Bundestag (Lower House of Parliament) vote was resounding, with 513 votes (71%) in favor of denting the “debt brake,” well above the two-thirds required. In the Bundesrat (Upper House) it was higher still, at 76%.
For the security hawks, borrowing for defense spending has effectively become unlimited, with estimates of around €400‒€500 billion, and for the domestic pacifists, there is a new special purpose fund of €500 billion destined for infrastructure investment, for energy,2 transportation, schools and hospitals.
It is hard to exaggerate the wider impact of this move, and although German bond yields rose, the equity market has also been rallying, and the euro moved higher. Why? Because this increase in debt (probably €1 trillion) is effectively a pro-growth stimulus for an economy that is desperate for resuscitation. As such, it ticks all the boxes investors want to see: defense, infrastructure, energy and, even more importantly, the likelihood of EU-level borrowing, which could potentially result in the creation of a wide, deep and liquid Eurobond market, transforming the prospects for the eurozone countries and making the euro more attractive as a reserve currency.
For Europe, these investments will likely drive the development of a resilient, structurally low-cost continental power grid, which could provide a significant boost to productivity, catapulting the region forward.
Finally, isn’t it curious that, since Konrad Adenauer,3 successive German chancellors have pushed back on French efforts to create an EU that is more independent of the United States, and that a textbook Atlanticist like Friedrich Merz is the one to pull that lever? Maybe Charles de Gaulle4 had a point.
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1. In English, this term means a “turning in time,” or a change in paradigm. The last time a Wende (turning) was part of political terminology was in 1989-1990, referring to German reunification.
2. See Catechis, Kim and Kosinska, Karolina. “Consider This: Could Europe build a structural advantage via cheap electricity?” franklintempleton.co.uk. February 28, 2025.
3. Konrad Adenauer was the Federal Republic of Germany’s first chancellor (1949) and took the country into NATO (1955) and the European Economic Community (1957), the forerunner of the European Union.
4. Charles de Gaulle was a general and statesman, leader of the Free French during World War II and twice president of France in the 1950s and 60s. He consistently pushed for a militarily and economically strong France, with allies, but independent of the United States and the United Kingdom.
