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Investing.com -- Germany’s fiscal landscape could be on the verge of a significant shift, UBS analysts told investors in a note Friday.
Chancellor-in-waiting Friedrich Merz has proposed a major increase in defense and infrastructure spending, a move that UBS analysts believe has the potential to “improve the domestic and regional investment outlook.”
However, near-term uncertainties—particularly regarding U.S. tariff risks—are said to warrant a cautious investment approach.
If approved by the Bundestag, the plan would free up EUR 500bn for infrastructure investment and exempt defense spending over 1% of GDP from Germany’s “debt brake.”
According to UBS, these measures could lead to a cumulative 20% increase in government spending over the next decade, which could bolster consumer and business confidence even before funds are fully deployed.
Market reactions have been swift. UBS notes that “the euro and Bund yields rose following the announcement” and that Germany’s DAX index is up 13% this year as of March 13.
Meanwhile, they note that Merz has defended his proposals in parliamentary debates, stating that “Germany must return to the international stage as an effective partner in NATO, in Europe, and in the world.”
From an investment perspective, UBS sees opportunities but also advises selectivity.
“We favor selective exposure via our ‘Six ways to invest in Europe’ theme,” the analysts state, highlighting Eurozone industrials, small and mid-cap equities, and quality corporate bonds.
Additionally, UBS views the recent rise in bond yields as an opportunity to lock in durable income.
Despite concerns over U.S. tariffs and broader economic uncertainties, UBS believes Germany’s fiscal profile remains strong enough to shoulder the extra spending without jeopardizing its AAA credit rating.
“Higher German government spending could improve the domestic and wider regional investment outlook—but near-term risks remain, especially around US tariffs,” stated UBS.