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On the face of it, Germany’s beleaguered chancellor Friedrich Merz has a lot in common with ousted UK prime minister Sir Keir Starmer. Both had to contend with a sluggish economy, high energy costs and crumbling infrastructure — as well as the implosion of their personal brand.
But Merz, who has vowed to fight on after a “disaster” election result in the election in the — admittedly small — state of Mecklenburg-Vorpommern, does have one rather sizeable advantage Starmer never had: money to throw at the problem. While the UK budget will be constrained by high debt and financing costs, frugal Germany would appear to have the fiscal headroom to try and spend its way out of the impasse.
On a bird’s-eye view, at least, Merz has scored some successes. Since he relaxed Germany’s “debt brake” for defence and infrastructure spending in 2025, the German economy has returned to growth: GDP is expected to be up by roughly 1 per cent this year, think Goldman Sachs strategists, with growth accelerating to 1.3 per cent by 2028. Exports have been a particularly sunny spot, up by 2 per cent quarter-on-quarter in the second quarter of 2026. Yet, going by recent election results and polls, voters are not overwhelmingly pleased.
In part, it may be that the ramp-up in spending has been slower than hoped, especially on the infrastructure front. Analysts at Panmure Liberum reckon that, at the end of July 2026, investment in goods, land, equipment and the like was below what it was the year before. That may reflect the fact that, while ordering defence equipment is a relatively straightforward thing to do, actually getting big projects drawn up, approved and built isn’t, especially in a country that has underinvested in civil works for decades.
It is also quite possible that the money which has left government coffers has not — yet — reached voters. UBS, which tracks the progress of the fiscal stimulus by looking at indicators including surveys, sentiment and company order books, reckons there are clear signs of increased spending in defence and emerging signs in the infrastructure sector.
This is starting to feed through into higher forecast earnings for German companies: analysts expect earnings per share to grow by 17 per cent in 2027, roughly twice as much as the broader European stock market index, according to Goldman Sachs. Companies such as Siemens Energy and Thyssenkrupp have benefited from the market tailwind.
But consumer sentiment is still soggy. And the “vibes” are not helped by the terrible performance of Germany’s traditional manufacturing heartlands, including Volkswagen, which on Monday fell out of the Euro Stoxx 50 index as its stock fell to a 16-year low.
If money is indeed on its way to people’s pockets — and to the extent that their voting preferences are economically motivated — it may well be that, over time, the German government manages to right the ship.
But that will only work if the country’s fractious politics do not upend Germany’s recovery in the meantime. One concern is that Merz may slow down planned structural reforms, including that of the country’s pension system. Another is that the uncertainty may slow corporate investment.
More broadly, in politics — as in cycling, for example — a loss of momentum can lead to lots of undignified swerves and wobbles. Starmer found that out the hard way. Avoiding a similar outcome may be Merz’s best bet.
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