Let's Chat About the German Economy's Recovery Plan: Special Fund Uncertainties
Future of German Economy Hinges on Special Assets
By: Jules K.
Germany's future economic prosperity hangs in the balance as political figures clash over a proposed 500 billion euro special fund for infrastructure. This fund aims to rejuvenate the economy, but will it? Here's the inside scoop.
The economic climate, already strained by the USA's tariff policies, could significantly benefit from this financial package. But will it be enough to counteract the current struggles? Leading German research institutes have offered varied predictions for the spring.
According to the Kiel Institute for the World Economy (ifW), a black-red federal government may witness a growth spurt next year if the plans are implemented, although growth is not expected this year. Instead, the institute forecasts economic stagnation. "The economic landscape remains weak, and signs of recovery are thin on the ground," they state. The German economy grapples with structural issues that are unlikely to ease in the short term.
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For 2026, the forecast for the gross domestic product has been significantly raised from 0.9 to 1.5 percent. "The planned defense spending could offer a structural boost if used wisely," notes IfW President Moritz Schularick. Money should flow into German or European companies, as well as technological defense solutions. This investment could stimulate the civilian industry.
Economists at the Leibniz Institute for Economic Research Halle (IWH) share similar sentiments. They predict a mere 0.1% growth this year, whereas the Kiel Institute anticipates stagnation. For 2026, the IWH confirms its growth forecast of 1.3%. "The additional public spending should gradually stimulate the economy," says IWH Vice President Oliver Holtemoeller. The economic climate is "crisis-ridden, characterized by a loss of international competitiveness and weak investment."
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The RWI, on the other hand, has a different perspective. This Essen-based institute predicts that Germany will face its third consecutive recessionary year in 2025. The gross domestic product is expected to decrease by 0.1%, and if this occurs, it will mark the longest economic downturn since the formation of the Federal Republic. In December, economists anticipated 0.6% growth. However, the forecast for 2026 has been lowered from 1.3% to 1.2%. They believe overall economic uncertainties will linger.
RWI's Chief Economist Torsten Schmidt attributes the disparate forecasts to disagreements among institutions regarding the economy's current phase and the actual implications of factors affecting the German economy. High uncertainty surrounds both U.S. tariffs and Germany's complex coalition negotiations, leading consumers and businesses to hold back on spending. "There's a wide range of opinions on when and to what extent the special fund will take effect," says Schmidt.
Politics: Collusion Begins; The Old Bundestag Discusses Black-Red Debt PackageThe RWI does not believe the measures will deliver immediate results. According to Schmidt, defense investments primarily target a select group of companies, such as Rheinmetall. Adding more large orders could strain these companies' capacity to complete them swiftly. "It's possible that companies will expand their capacity, but that will take time," Schmidt says. Thus, RWI anticipates no immediate effects from either defense or infrastructure, but rather an impact within the next year.
Stimulating the Economy: Schmidt's ViewpointsSchmidt advocates for reliable investment frameworks to stimulate economic recovery. He emphasizes the importance of government action in energy supply and climate goal achievement. Once clarity emerges regarding these matters and forthcoming measures, businesses will invest. "Uncertainty persists on whether an investment made today will still be profitable in five years, so these investments won't happen," Schmidt explains.
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Both institutes concur that increased uncertainties from potential U.S. tariffs exacerbate trade tensions. If U.S. President Donald Trump increases tariffs on German imports as per the ifW forecast, it could further curb economic growth. Reinhard Pfingsten, Chief Investment Strategist at Deutsche Apotheker- und Ärztebank, sees a possibility that the trade dispute will resolve, but also notes, "This administration shows genuine determination." In this administration, the U.S. President is predominantly driven by fundamental issues, and trade disputes are likely to persist for an extended period.
- Institute for World Economics Kiel
- Rheinisch-Westfälisches Institut für Wirtschaftsforschung
- Special Fund
- Economic Projections
- The economists at the Institute for World Economics Kiel, the Leibniz Institute for Economic Research Halle, and the Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI) all have differing economic projections for Germany, with the RWI predicting another year of recession in 2025.
- A German special fund aimed at infrastructure and vocational training is expected to stimulate the economy, but economists like Moritz Schularick from the Institute for World Economics Kiel are emphasizing the need for the money to be wisely allocated, focusing on German or European companies and technological defense solutions to stimulate the civilian industry.
- The RWI Chief Economist, Torsten Schmidt, suggests that while defense investments will eventually have an impact, it is unlikely to occur right away, and that a reliable investment framework and government action in areas such as energy supply and climate goals are necessary to stimulate economic recovery.
