Markets View German Fiscal Package as Growth-Oriented
The recent announcement by the German government to ease fiscal constraints on defense spending and state finances while introducing a €500 billion investment program for infrastructure has been positively received by capital markets. An analysis by the Kiel Institute for the World Economy shows that investors interpret these measures as economically stimulating rather than a fiscal risk.
"The steeper yield curve, rising stock prices, an appreciating euro, and stable credit default swap prices suggest that markets view the German fiscal package as growth-oriented," says Farzad Saidi, Kiel Institute Fellow and co-author of the latest Kiel Policy Brief “In Merz We Truss: Financial Market Reaction to Germany’s Fiscal Package”.
The contrast with the UK’s fiscal policy under Prime Minister Liz Truss in 2022 is striking: While the announcement of massive, unfunded tax cuts led to a broad market downturn at the time, Germany is experiencing positive capital market reactions across various asset classes. This reflects market confidence in Germany’s fiscal credibility.
Although the policy shift introduces some uncertainty, as indicated by slight increases in the European VSTOXX volatility index, the overall market reaction remains measured. "The slight rise in volatility is also attributable to global factors. Overall, however, we see no indication that Germany has lost its status as a safe haven," says Saidi.
Rising Yields Reflect Growth Expectations
The rising yields on German government bonds have been interpreted by some commentators as a potential risk. However, the Kiel Institute’s analysis shows that long-term interest rates have increased more than short-term rates, which traditionally signals rising growth expectations rather than fiscal instability. At the same time, the DAX recorded gains, and the euro appreciated against the US dollar. Credit risk premiums for Germany and other eurozone countries remained stable or even declined.
The relaxation of fiscal rules and massive investments in infrastructure and defense could not only strengthen Germany’s economic performance but also help mitigate geopolitical risks in Europe. "A targeted fiscal expansion can have long-term stabilizing effects, particularly when funds are directed toward economically productive areas," says Saidi.
The Kiel Policy Brief thus shows that capital markets view Germany’s fiscal course as responsible and anticipate positive economic effects. While uncertainties remain, the market response suggests that the package is perceived as both growth-oriented and credible.
