Published by Global Banking and Finance Review
Posted on March 21, 2025
By Rene Wagner, Victoria Waldersee and Maria Martinez
BERLIN (Reuters) - Germany gave the final green light on Friday to a massive surge in borrowing seen as boosting the country's anaemic economy and ailing corporate sector - but just not in the short term.
Chronic labour shortages and numerous bureaucratic procedures needed to launch spending plans and tendering processes will delay the positive ripple effect both for companies and an economy that has contracted for two straight years.
While no one contends that procedures for allocating huge sums of public money should be anything less than rigorous, German business leaders say that process will inevitably take time.
The fiscal plan includes a 500-billion euro ($545 billion) special fund for infrastructure and plans to largely remove defence investment from the rules that cap borrowing.
Marc Tenbieg, head of the DMB association - which represents the thousands of "Mittelstand" small and medium sized firms that power the domestic economy - says that red tape, complex European tendering requirements and personnel bottlenecks often meant past funding did not get used effectively.
"It will not be enough to simply pump more money into infrastructure projects," he said.
Financial markets have welcomed the historic reforms, sending Germany's blue-chip DAX 30 to record highs this week with the construction and defence sectors expected to benefit the most.
Berlin's plans have also fuelled a rally in the euro and euro zone yields, with the German 10 year yield reaching 2.938% last week, its highest since October 2023.
Yet economists say the fiscal expansion, formally approved on Friday by the upper house of parliament, will not provide a quick fix for the economy this year.
"The more comprehensive effects are to be expected for 2026 and 2027, when the awarding of contracts by state actors picks up speed and companies have expanded their capacities," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
Germany's DIW economic institute says the planned infrastructure fund alone could raise economic output by an average of more than two percentage points a year over the next 10 years. With the deal on a defence and infrastructure spending ramp-up, it expects the economy to grow 2.1% in 2026, instead of 1.1%.
Still, it recently revised its forecast for the economy this year, saying it will stagnate due to weak private spending, after forecasting in December that it was set for 0.2% growth.
Likewise, business executives across the manufacturing heartland who are struggling with high labour and energy costs, and cutting jobs, are not joining in the cheer just yet.
"It's too early for this to really spur confidence for investment decisions," said Ulrich Flatken, head of Mecanindus Vogelsang, which produces cylindrical fasteners for carmakers and other industrial clients and has a staff of 450.
"Let's see whether truly tangible structural reforms become part of a coalition agreement," he said, referring to talks between political parties to form a coalition government following last month's election.
CAPACITY CONSTRAINTS
Germany has lagged other European economies over the past two years. Jesko von Stechow, CFO of gas producer Westfalen AG, said a mix of EU and domestic regulation had "virtually choked off the economy" and called on the country's new leadership to make drastic reductions to bureaucracy.
The spending plans have revived the fortunes of some of Germany's oldest and downtrodden companies - ThyssenKrupp has doubled in value in a month.
But while its European steel business, the continent's second-largest steelmaker, welcomed the stimulus this week, its head said he is sticking with plans to cut capacity and jobs.
Siemens announced plans on Tuesday to cut 5,600 jobs at its Digital Industries business.
Around 340,000 academics from the STEM sector - Science, Technology, Engineering, Mathematics - are expected to leave the labour market by 2035, worsening the current gap of around 130,000 vacancies in engineering and IT professions.
"We need more engineering capacity to implement the huge investment package in concrete projects that will take several years," Adrian Willig, director of the Association of German Engineers (VDI), told Reuters.
Some even warn of a potential overheating of the economy unless those production capacities are expanded.
"Otherwise, there is a risk the enormous demand from the investment packages will lead to a sharp increase in inflation," said Robert Grundke, senior economist for the Organization for Economic Cooperation and Development think tank.
(Reporting by Rene Wagner, Victoria Waldersee and Maria Martinez, additional reporting by Vera Eckert; editing by Mark John, Josephine Mason and Susan Fenton)
Explore more articles in the Finance category
