Germany’s Economic Woes Deepen Despite Bold Investment Pledges and Fiscal Overhauls

Berlin's grand promises meet harsh reality as Europe's largest economy continues to underperform.

Fiscal Reforms Fall Flat

Chancellor's much-touted stimulus package fails to move the needle on growth metrics. Manufacturing contracts for third consecutive quarter while service sector confidence hits 18-month low.

Investment Gap Widens

Corporate capital expenditure drops 4.2% year-over-year despite tax incentives. Infrastructure projects face delays as bureaucratic hurdles overwhelm implementation timelines.

Market Skepticism Grows

Bond yields spike as investors question Germany's ability to maintain its economic dominance within the EU bloc. Traditional finance showing its usual sluggish response to innovation—meanwhile, digital asset markets continue outpacing legacy systems with actual efficiency.

Government promises not translating into actual growth

Germany’s gross domestic product ROSE by just 0.3% in the first quarter of 2025. Then it shrank by 0.3% in the second. That’s after full-year contractions in both 2023 and 2024.

The euro zone didn’t fare much better—GDP across the bloc went from 0.6% growth in Q1 to 0.1% in Q2. It’s sluggish across the board. But Germany was supposed to lead the recovery. That’s not happening.

European Central Bank Governing Council member Martins Kazaks told CNBC earlier this month that “the big hope lies on Germany” when it comes to fiscal spending boosting the region’s growth next year. The Optimism isn’t backed by results. Germany hasn’t delivered.

Holger Schmieding, chief economist at Berenberg, said a “major rise” in defense orders and infrastructure activity had technically begun. But in his words, “we are not seeing it strongly in actual output data yet.”

Holger added that everything was going about as expected after the debt brake rule change, but warned that public spending is rolling out slower than many expected. “In Germany, it takes time to spend money,” he said.

While some of the investment is tied up in long-term projects, other spending choices are now drawing more questions. Franziska Palmas, senior Europe economist at Capital Economics, flagged that Berlin isn’t just boosting defense and infrastructure, it’s also spending in other areas.

“The government is not just raising defence and infrastructure spending,” Franziska said, “it is also using some of the additional fiscal space to finance other spending.”

Extra deficit, small results, and regional drag

Franziska pointed out that part of this includes electricity tax cuts for businesses. That could help a little. But most of the rest—like pension top-ups, healthcare, and social benefits—is going toward covering rising costs.

“The additional spending on healthcare and pensions won’t boost the economy,” she said, “given it reflects mainly rising costs due to demographics.”

There’s no real sign that all this spending will lead to a meaningful recovery anytime soon. German economic institutes have already downgraded growth expectations to just above 1% for 2026. The ECB expects the euro zone as a whole to grow by 1% that year.

Holger doesn’t see much impact beyond that. He calculated that Germany’s stimulus might boost its own GDP by 0.3 percentage points. That could translate into a 0.1% boost for the wider euro zone. Franziska’s forecast was even lower: she expects Germany to contribute only 0.2% to euro zone growth in 2026.

Meanwhile, other players in the bloc are pulling in different directions. Franziska said that Spain’s economy is growing faster, helped by immigration and more jobs.

ECB rate cuts could also help nudge some growth across Europe. But other forces are holding things back. Franziska warned that recent U.S. tariffs could drag euro zone GDP down by 0.2%, and France’s own budget cuts could hurt growth, too.

Holger said Germany’s eventual recovery could still lift others a little. He expects a “modest positive confidence effect” from Germany’s shift “from its mini-recession until mid-2024 to significant growth from late 2025 onwards.” That could matter to its neighbors, especially because Germany is usually their most important trade partner.

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