Deutsche Bank: Germany's Fiscal Bazooka Has Its Limits

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Without deep structural reforms, the effects will likely fade beyond 2027.

Germany's sweeping fiscal stimulus plan may give the economy a much-needed boost, but it won't be enough to engineer a lasting growth revival, Deutsche Bank economists warned in a note on Friday.

While the constitutional reform of the country's "debt brake" marks a historic shift in policy, the bank sees structural limitations on how far the fiscal push can go.

Following the Bundesrat's approval of reforms to the debt brake rule, Deutsche Bank now forecasts German real GDP growth to rise to 1.5% in 2026 and 2.0% in 2027, before slowing to around 1% by the end of the decade.

The fiscal expansion is expected to push the structural deficit to 4.1% of GDP by 2027, compared to 2.0% in 2025.

"There is no doubt that a fiscal package of this size will boost growth," the report states. "However, without deep structural reforms, the effects will likely fade beyond 2027."

Temporary Momentum

The bank estimates the cumulative fiscal impulse at just under 2% of GDP by 2027, with spending focused on infrastructure and defence. Infrastructure spending is projected to hit €60 billion by 2027, up from €30 billion in 2026, as a so-called "ketchup bottle effect" kicks in. Defence spending, seen as a wild card, could rise from €80 billion in 2025 to €150 billion in 2027, potentially peaking at 3% of GDP.

Even with these large numbers, the impact may be fleeting. Deutsche Bank expects potential growth to climb only modestly—from 0.5% in 2025 to around 1% in 2029.

"It would take deep structural reforms to raise potential materially above 1%," the report cautioned.

Labour and Inflation Pressures

The stimulus is also expected to fuel wage and inflation pressures. Core inflation is forecast to remain closer to 2.5% than 2.0% through 2027, driven by stronger public demand and a tighter labour market. The report notes that a planned minimum wage hike to €15 per hour and rising public sector employment could amplify wage growth.

Unemployment is expected to decline gradually from 6.2% in 2025 to 5.5% by 2029, but labour shortages and demographic trends will constrain broader employment gains.

Debt Path Manageable, But Not Without Risk

Public debt is forecast to rise slowly, from 64% of GDP in 2024 to around 67% in 2029. However, Deutsche Bank warns that absent supply-side reforms, deficits of 3.5%-4.0% of GDP would push the debt ratio higher into the next decade, potentially reaching 75% by 2035.

While the market may tolerate such levels, the report notes that rising debt could trigger domestic political pressure to tighten fiscal policy once again.

"The full potential of the fiscal reform will only be realised if complemented by supply-side reforms," the report concludes.