German Elections: Investors Urge Increased Spending for Economic Growth

As Germany prepares for upcoming elections, investors convey a clear message: Germany, as the only major economy with significant fiscal headroom, should prioritize increased spending to stimulate growth. However, skepticism persists that the incoming government will commit to substantial spending increases and borrowing.

Case for Increased Spending

Germany's economy has stagnated since 2019, trailing the eurozone (5% growth) and the U.S. (11%). Despite concerns about debt levels in other G7 economies, Germany remains the sole member with debt below 100% of GDP. Investors advocate for increased borrowing to boost growth potential.

Debt Brake Rule and Economic Concerns

Germany's debt brake rule prohibits new borrowing, a constraint that may stifle economic recovery amid U.S. tariffs and increased defense spending needs. Conservative leader Friedrich Merz has hinted at potential debt brake reform, but expectations are modest due to EU deficit limits.

Market Impact

Limited debt brake relaxation is anticipated by a majority of investors. However, European bonds remain attractive, with interest rate cuts expected to drive markets rather than increased spending.

Prospects for European Stocks and Currency

A significant spending increase could bolster the battered euro and underperforming European stocks. However, unless spending is sufficient to offset Europe's slower growth compared to the U.S., the euro's weakness may persist.

German Equities

German blue-chip stocks have outperformed U.S. stocks in recent years, but trade at a significant discount on forward earnings. Mid-cap and small-cap stocks have experienced losses, notably in the automotive sector.

Mergers and Acquisitions

Debt brake reform could stimulate mergers and acquisitions activity, which has declined in Germany. However, uncertainty remains regarding the new government's ability to address competitiveness issues that have hindered economic growth.