Investing.com - Discussions in Germany over establishing new funds dedicated to spending on defense and infrastructure appear to be a "paradigm shift" for Europe’s largest economy, according to analysts at Deutsche Bank (ETR:DBKGn).
Over the weekend, Reuters reported that parties in the country are in talks over setting up the two funds, which would potentially be worth hundreds of billions of euros.
Economists advising the parties who are negotiating a new coalition government following last month’s federal elections are estimating the defense fund could amount to around 400 billion euros, while between 400 billion euros to 500 billion euros will be allocated to the infrastructure fund, Reuters reported, citing sources familiar with the matter.
A hot-tempered exchange between U.S. President Donald Trump and Ukrainian counterpart Volodymyr Zelenskiy at the White House on Friday intensified the sense of urgency in Berlin around boosting defense spending in particular, Reuters reported.
Several European countries, including Germany, have begun to shift their focus to potentially placing more funds into military spending, spurred on by recent statements and actions by the Trump administration that have cast serious doubts over whether the region can rely on the U.S. to provide a longstanding security backstop.
Friedrich Merz, the head of the conservative bloc in Germany and likely the country’s next chancellor, has said lawmakers should "hope for the best and prepare for the worst" regarding its relationship with the U.S.
Germany’s conservative bloc and current Chancellor Olaf Scholz’s Social Democrats have been in exploratory talks around forming a coalition government by Easter that would be led by Merz, Reuters reported.
Hopes remain that the defense and infrastructure funds could be approved by the current parliament prior to the formation of a new government, although no final decisions have been made, the news agency said.
In a note to clients on Monday, analysts at Deutsche Bank led by Robin Winkler flagged that the two funds would jointly amount to roughly 20% of Germany’s gross domestic product, adding that, even if it were spent over ten years, the money would be around as much as the country has invested in East Germany since reunification in 1990.
"In other words, it would be a fiscal regime shift of historic proportions," Winkler wrote.
Winkler noted that much of the debate in Berlin centers around the easing of Germany’s government fiscal rules, particularly the loosening of a limit on borrowing known as the "debt brake." The issue has proved to be a major sticking point in recent months, with the matter even helping lead to the fall of Scholz’s government late last year.