Big money is rushing to Europe in light of Germany’s defense shift

Germany’s pivot toward strengthening its military with a Europe-first approach has won the backing of the continent’s financial titans.

“We believe that Germany’s fiscal expansion plans, centered around increased defense spending, have the potential to improve the investment outlook domestically and for the wider European region,” UBS wrote on Friday.

UBS pointed to Europe’s stronger stock performance compared to the U.S.

The EURO STOXX 50, which tracks stock markets from 11 European countries, is up 11.19% this year, while the S&P 500 is down 1.68% over the same period.

Allianz also voiced support for Germany’s push to increase debt limits to fund military spending.

The outgoing government and presumptive Chancellor Friedrich Merz are in talks to remove defense spending from the country’s self-imposed debt limit, allowing for a more aggressive expansion of its armed forces.

“If implemented quickly, the proposed fiscal package of +2% of GDP could pull Germany out of stagnation over the next two years, potentially raising GDP by +0.5% in 2025, +2.1% in 2026, and +2.4% in 2027,” Allianz wrote in a post on Friday.

The bank warned, however, that such a move could spur inflation and significantly increase national debt.

On Wednesday, Germany’s 10-year bond saw its sharpest sell-off since the fall of the Berlin Wall. Allianz suggested the bond market reaction was a positive sign for Europe’s largest economy.

“This move can be seen as pro-growth rather than a credit-risk event, as it was largely driven by higher real yields, soaring equity prices, and a stronger euro,” Allianz noted.

Germany’s defense ambitions

Germany is pushing the European Union to allow member states to take on debt to fund "necessary defense spending."

Concerns that the U.S. may scale back its support for Ukraine have motivated German politicians across party lines to back a military spending spree.

To meet NATO’s target of 2% of GDP, Germany would need to increase its defense budget by $32.5 billion per year. Higher military spending is expected to provide a moderate economic boost, according to Goldman Sachs.

“The team’s baseline assumption is that the EU will gradually increase its annual defense spending by around €80 billion ($84 billion) by 2027—equivalent to roughly 0.5% of GDP,” they wrote in a report on Thursday.

For every $100 spent, GDP is projected to rise by $50, according to their estimates. The economic impact, however, hinges on European nations purchasing domestically made military equipment rather than imports.

European Central Bank policymaker Mário Centeno acknowledged concerns about Europe’s economic outlook on Friday but called Germany’s defense investment plans an encouraging step.