Analysis by Morgan Stanley
Jens Eisenschmidt (European macro analyst) summarises the key takeaways from a trip to Berlin with policymakers and experts in economic and defence policy. The main message points to an acceleration of Germany’s reform agenda before the summer, with the focus on pensions, the labour market, defence and public investment. Although implementation will remain gradual, the authorities are seeking to send a clearer signal of their commitment to structural growth and the competitiveness of the German economy.
Pension reform is emerging as a key focus for the markets, with growing expectations of a greater shift towards partially funded schemes and increased allocation to financial markets, following models similar to the Swedish one. This would be positive for asset managers, investment platforms and banks with exposure to Germany, such as DWS, flatex, DEGIRO, Deutsche Bank, BNP Paribas, UBS and Amundi, and could encourage further development of European capital markets.
In defence, the message from the experts consulted suggests that the momentum of orders remains intact, albeit more delayed than the market had expected. The main bottleneck is no longer a lack of budget, but rather the procurement system’s capacity for execution and the need to expand industrial capacity. Although reforms to speed up contract awards are progressing slowly, there is a strong belief that the pace of procurement will accelerate significantly towards the end of the year, enabling the government’s target of €120 billion in defence spending to be met, compared to the current annualised run-rate of approximately €83 billion.
The 2027 budget and the infrastructure fund remain central to Germany’s growth strategy. The government maintains its objective of bolstering public investment through a €500 billion fund with a one-year horizon, although various stakeholders acknowledge that the deployment of spending will likely be more gradual than initially anticipated. Even so, the fund’s temporal flexibility, the ability to transfer resources between financial years, and long-term investment commitments should support capacity expansion and limit inflationary pressures associated with increased spending. In parallel, the so-called “Germany Fund”, designed to mobilise private capital through public guarantees, is seen as another key tool for boosting investment and growth, although its full implementation will still take time.
Labour and tax reforms are also part of the package the government aims to pass before the summer. Among the measures under discussion are a possible relaxation of protection against dismissal for high earners or small companies, as well as a shift from a daily limit on working hours to a weekly framework aligned with European regulations. On the fiscal front, the aim would be to ease the burden on middle and lower incomes, although this is conditional on the need to offset the budgetary impact through higher revenues or spending cuts. Beyond the direct effect on disposable income, the authorities believe that these measures could encourage labour supply in a context marked by an ageing population and a shrinking workforce.
