Hope for the German economy comes from two sides: a more modest approach to the anticipated beggar-thy-neighbor policies in the US, and a surge in confidence and growth in Germany after the elections. Regarding the latter, the more optimistic scenario includes a new government that agrees on structural reforms, investments and looser fiscal policy. Whether looser fiscal policy also means a reform of the constitutional debt brake or just some workarounds via exemptions or special purpose vehicles depends on the outcome of the elections.
Given the growing consensus across most parties on the need for more investments, we see looser fiscal policies in Germany materialising, at the latest in 2026. Just to make up for the investment gap accumulated over the last decade, Germany would need additional investments of 1.5% GDP per year over the next 10 years. This is not all public investments, but the government will have to play an important role in providing public goods like infrastructure and education and to create incentives for private investments. Currently, the most likely outcome after the elections is at least an infrastructure investment fund.
At the same time, however, it is also becoming increasing clear that even in a best-case scenario with reforms and investments, any new government will not try to overhaul the old economic business model, but will rather try to rejuvenate the old one. Less red tape, some tax cuts to stimulate spending and investments, possibly attempts to lower energy costs and infrastructure investment – all of which feature in any European economist’s wish list for Christmas, and a growth booster for the economy.
Whether these measures will really be sufficient in competing against China and the US is a completely different question. What Germany would get is a refurbished model of its economy – clearly better than the old one with cracks, battery failures and very few gadgets, but also not a shiny, sprinkling new model that makes the competition speechless.