Germany’s New Economic Era: How Berlin’s Fiscal Shift Could Redefine Europe
For decades, Germany has been defined by fiscal conservatism. Through crises like the eurozone debt crisis in the 2010s, Europe’s largest economy has developed a reputation for frugality. The German government has steadfastly adhered to strict austerity and fiscal discipline. For a nation shaped by the trauma of Weimar-era hyperinflation a century ago, financial caution is deeply ingrained. However, facing a stagnating economy, the threat of U.S. tariffs, and rising security concerns amid Russia’s war in Ukraine, the German parliament in March 2025 passed significant fiscal reforms, ushering in a new era of spending and signaling a potential reorientation of the country’s economic behavior.
In the 1920s, the aftermath of the First World War and the Treaty of Versailles placed an enormous financial strain on German society. The Ruhr Crisis of 1923, in which French and Belgian troops occupied the region after Germany missed reparations payments, triggered the collapse of the currency and accelerated hyperinflation. Middle-class savings were wiped out, the working class sank deeper into poverty, and public trust in the state eroded. This catastrophe left Germans with a lasting economic trauma.
Although the Weimar government eventually stabilized the currency, the Great Depression later brought a new wave of economic catastrophe. When American banks began recalling loans in 1928, Germany plunged into the worst crisis in Europe. Unemployment skyrocketed from 1.6 million in 1929 to over 6 million by 1932, overwhelming the welfare system. Chancellor Heinrich Brüning’s policies, intended to balance the budget and preserve monetary stability, instead deepened the depression and fueled public outrage. Economic collapse was accompanied by renewed political instability, the rise of the National Socialists, and ultimately World War II.
This economic trauma left a deep imprint on German political culture. By the late 20th century, German politicians routinely invoked the memory of the Weimar-era collapse to justify strict fiscal discipline. References to the inflation, instability, and dangers of the debt in the 1920s became powerful tools in public debate, establishing fiscal conservatism as a core tenet of modern German identity.
Germany’s commitment to fiscal conservatism was unmistakably clear during the eurozone debt crisis of the 2010s. In the wake of the Great Recession, several smaller European economies, most notably Greece, approached bankruptcy. When Athens appealed to the European Union for assistance, Berlin reluctantly agreed to a bailout only on the condition of drastic austerity reforms. As a result, Greece passed legislation laying off thousands of public servants and instituting budget and wage cuts. Germany framed this approach as fiscal responsibility, while critics argued it was counterproductive. At the time, Nobel Prize-winning economist Joseph Stiglitz commented, “Europe’s problem isn't Greece, but Germany,” highlighting Berlin’s outsized influence.
Yet, the policy backfired. Austerity worsened Greece’s economic fortunes and impeded the recovery process. Eventually, Chancellor Angela Merkel’s government softened its stance by reducing interest rates and extending repayment timelines. This triggered backlash at home, with prominent German economists warning of moral hazard and fiscal collapse if Germany shouldered the burden of other countries’ mistakes. This fear helped lead to the rise of the Alternative for Germany (AfD), a party born from opposition to eurozone bailouts that has in recent years taken a turn toward the far-right.
Merkel also cemented fiscal restraint at the constitutional level. In 2009, Germany adopted the debt brake, a rule instituted following the 2008 financial crisis that strictly limited budget deficits and government borrowing. It is one of the most restrictive fiscal frameworks in any advanced economy. By enshrining austerity, Germany ensured that fiscal conservatism was not just a preference but a defining feature of its economic identity.
In March 2025, the German parliament passed a historic fiscal reform package that went against its tradition of austerity. Berlin was under mounting pressure to address two years of a stagnating economy, the prospect of U.S. tariffs, sustained infrastructure problems, and rising security demands. The reform package authorized significantly increased spending on defense, along with a €500 billion infrastructure fund, while exempting these expenditures from the constitutional debt brake. Robin Winkler, the chief German economist at Deutsche Bank Research, stated, “This is a historic fiscal regime shift, arguably the largest since German reunification.”
In September, parliament approved the country’s first annual budget since the reforms, allowing for €116 billion worth of public investment and an exemption from debt rules for defense spending. With the 2025 budget completed, the political debate has swiftly refocused on 2026. Chancellor Friedrich Merz’s conservatives are pushing for cuts to welfare spending, while Social Democrats are in opposition.
The economic outlook for Germany following this reform has been widely optimistic. Goldman Sachs forecasted on October 8, 2025 that Germany’s economy was expected to outperform in 2026. The report pointed to higher spending on infrastructure and defense as catalysts to boost GDP growth to 1.4 percent in 2026 and 1.8 percent in 2027, compared to just 0.3 percent in 2025.
Germany’s fiscal shift also carries major implications for the European Union, particularly in the realm of defense. Under pressure from U.S. President Donald Trump to reduce dependency on Washington, North Atlantic Treaty Organization (NATO) leaders agreed in June to raise the alliance’s defense spending target to 3.5% of GDP by 2035. Now, with more freedom to spend, Germany is poised to play an outsized role in meeting that economic target. Its defense budget, €86 billion this year, is projected to reach €150 billion per year by 2029, positioning Berlin as a central driver of European military investment.
As Germany ramps up spending, its defense industry is set to become crucial to European military production. The European strategic autonomy long championed by French President Emmanuel Macron will plausibly rest increasingly on Germany’s shoulders. Whether Berlin is willing to embrace that role remains uncertain.
Germany’s fiscal reform suggests the beginning of a new economic era for the country. As Berlin spends more on infrastructure and defense, shedding its reputation for fiscal discipline, it is redefining both its domestic identity and its role within Europe. For the first time in decades, Europe’s stability may hinge on Germany’s willingness to lead by spending, rather than by saving.