German Defense Spending Signals Eurozone Growth

By: Apoorva Kuppa, The Quinnipiac University Global Economics Research Team 

Photo by DON JACKSON-WYATT on Unsplash

On March 19th, Goldman Sachs published their article titled "Defense spending to boost German and European GDP growth." The investment bank reports that Germany and the broader euro area are poised for stronger economic growth, largely due to rising government and defense spending. This rise in GDP aligns with basic economic principles; since government spending is a major component of aggregate demand, increasing it tends to boost overall demand and, in turn, real GDP.

Following Germany’s recent elections, a potential coalition between the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) is pushing a fiscal plan that includes exempting defense spending above 1% of GDP from the country’s “debt brake” and establishing a €500 billion off-budget fund for infrastructure and climate projects.

In response, Goldman Sachs raised its GDP forecast for Germany: to 0.2% in 2024 (up from flat), 1.5% in 2026, and 2% in 2027. It expects defense spending to rise to 3% of GDP by 2027, with additional stimulus from tax cuts and expanded deficit allowances at the state level. Although implementation may be gradual, the potential for a faster rollout could lift growth even further.

Goldman Sachs also upgraded its eurozone outlook, expecting 0.8% growth in 2024 and 1.6% by 2027, noting that Germany’s momentum is likely to spill over into neighboring countries. France, Italy, and Spain are also forecast to ramp up defense spending significantly.

However, the bank warns of risks from U.S. trade tensions, which could dampen growth by up to 1%. Still, with fiscal policy doing more of the heavy lifting, it now expects the European Central Bank to stop cutting rates at 2%, with two modest cuts projected in April and June.

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