Germany’s Spending Boost: Fueling Europe’s Growth Despite Defense Concerns

Germany’s substantial fiscal stimulus is beginning to impact macroeconomic data, fueling optimism about a potential surge in European growth. Investors are increasingly betting on Germany to drive this expansion, but a key component of the plan – a significant increase in defense spending – faces potential hurdles.

The historic stimulus package includes a €500 billion ($591 billion) off-budget infrastructure fund dedicated to transport, digital infrastructure, and energy projects, alongside a planned increase in defense spending exceeding 1% of GDP. Bank of America analysts have already noted a 40% surge in German factory orders, including those for heavy machinery and arms, suggesting the stimulus is taking effect.

A recent Bank of America survey revealed that a record 74% of European fund managers anticipate accelerated growth in Europe, with Germany’s fiscal stimulus identified as the primary catalyst by 63%. This reinforces Germany’s position as the “engine of Europe” and solidifies its status as the most favored equity market in the region.

The German economy is forecast to grow 1.1% in 2026, a significant increase from the 0.3% growth experienced in 2025. This growth is expected to surpass Germany’s potential growth rate of 0.5%, according to Goldman Sachs Research.

Despite the ambitious plans, Goldman Sachs analysts caution that defense spending may fall short of targets this year. Whereas Germany’s defense budget has already increased by 25 billion euros to 119 billion euros – a rise of over 25% – the scale of the planned ramp-up presents execution challenges.

Yet, Goldman Sachs still anticipates an overall increase in defense spending to 109 billion euros, representing 2.4% of GDP, a hike of 21 billion euros, or almost 0.5% of GDP.

Germany’s commitment to increased military spending is part of a larger “defense mega-trend” driving sustained rearmament across the continent and a broader push for strategic sovereignty. German Chancellor Friedrich Merz recently acknowledged that the post-World War II rules-based order “no longer exists,” signaling a shift in geopolitical priorities.

Companies like Rheinmetall, the continent’s largest defense company, are poised to benefit from this increased focus on military autonomy. The company is seen as well-positioned to capitalize on the growing demand for defense products, and services.

While defense spending is a key component, the stimulus package also includes significant investment in infrastructure, including transport, energy, and digital technologies. However, execution rates for these areas may be mixed, with some categories potentially facing lower implementation rates than initially projected.

Overall federal spending is predicted to grow from €554 billion to €600 billion, but analysts anticipate a shortfall of approximately €33 billion compared to the government’s ambitious targets. Investment in hospitals and social security loans are expected to be fully executed, while transport infrastructure is projected to exceed 90% execution.

What is the size of Germany’s fiscal stimulus package?

The package includes a €500 billion ($591 billion) off-budget infrastructure investment fund and a defense spending increase of over 1% of GDP.

What is the projected growth for the German economy in 2026?

The German economy is forecast to grow 1.1% in 2026.

Is Germany’s defense spending on track to meet its targets?

Analysts caution that defense spending may fall short of the ambitious ramp-up, but an overall increase to 109 billion euros is still expected.

What is driving the optimism surrounding the German economy?

The optimism is driven by the implementation of the fiscal stimulus package and its expected impact on domestic demand and European growth.