LONDON, Oct 6 (Reuters) - One of the most transformative economic policy shifts in a turbulent year - Germany's market-moving fiscal boost - is about to kick in, but there's some trepidation about how all this spending and reform will actually pan out.
Despite all the focus on Washington's sweeping upheavals over the past nine months, arguably the biggest macro market driver of 2025 has been Germany's post-election plan to lift its stifling, self-imposed debt brake and spend almost a trillion euros on defense and infrastructure.
While the multi-year investment plan was always expected to truly begin hitting in 2026, markets almost immediately priced in a significant boost to the long-dormant growth potential of Europe's biggest economy as well as expected ripple effects across the continent.
This explains a sizeable chunk of the dollar's drop this year, as much as anything that's happened in Washington.
The euro's 13% surge against the greenback this year has all come since Germany's election in February. And this fiscal boost is one of the main reasons investors think the European Central Bank will not cut interest rates below the current 2% level through next year.
Expectations of a borrowing binge have pushed up 10-year German bund yields almost 30 basis points this year, even as the ECB has cut rates by a full percentage point. And 30-year rates have climbed about 70bp.
But the real lift came to the equity market, with the German DAX benchmark up 22% in the year to date and the mid-cap MDAX index also up over 20%, both outstripping Wall Street benchmarks by almost 10 percentage points. The electrified euro defense sector has climbed a whopping 75% in 2025 thus far - more than three times the gains for Wall Street's megacap 'Magnificent Seven'.
And even though euro zone aggregate corporate earnings growth estimates for 2025 have dwindled to zero, forecasts for 2026 have inflated to more than 12%.
The problem is that the excitement around the plans went a bit flat over the summeramid wrangling over how and where the spending should be allocated, what vehicles should be used and how much of the other promised reforms will emerge in 2026.
Deutsche Bank argues that investor frustration at the lack of delivery so far is "somewhat moot", as nothing was ever likely to happen before the final quarter of this year anyway, as the 2025 budget law was only passed last month.
Chief economist Robin Winkler reckons the 2025 federal government draft implies a steep rise in spending in the fourth quarter, not least because the deficit through July was only running at about 41 billion euros against a plan for 143 billion euros, or 3.3% of GDP.
As a result, Deutsche Bank said its original estimate that the overall plan could lift potential German growth by about half a percentage point to 1% by the end of the decade looks "increasingly hopeful".
"The sugar rush is coming and likely to boost cyclical growth for a while," Winkler wrote late last month. "Yet the long-term growth implications look dimmer than in the spring."
What's just as important for business confidence, Deutsche argues, is the government's structural reform plan - the "protein" to back up the "fiscal sugar".
