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Core Viewpoint - Germany's fiscal policy is undergoing a significant shift with the recent approval of a massive fiscal plan aimed at funding defense, infrastructure, and climate investments, potentially leading to continued growth in the German stock market and increased interest in European assets [1][4][5]. Fiscal Policy Changes - The new legislation includes the establishment of a €500 billion special fund for infrastructure investments over the next 12 years, with allocations of €300 billion for the federal government, €100 billion for state governments, and €100 billion for a climate transition fund [5]. - The "debt brake" rules have been adjusted, allowing defense spending exceeding 1% of Germany's GDP to be exempt from these restrictions, and aid to Ukraine is also included in the exemptions [5]. - Federal states are granted additional borrowing capacity equivalent to 0.35% of GDP, approximately €16 billion annually, for investment projects without the need to achieve budget balance [5]. Economic Impact - The substantial funding from the reforms is expected to stimulate economic growth through increased investments in infrastructure, climate protection, and defense, aligning Germany with post-2020 trends of fiscal expansion seen in the U.S. [6]. - Annual government spending is projected to increase by approximately €220 billion, with specific contributions from the special fund, military spending, and state government expenditures [6]. - The fiscal expansion could boost Germany's GDP by 1% to 2% by 2026, with varying impacts based on different economic scenarios [7]. Financial Market Effects - European assets have shown a notable upward trend, with the Stoxx50 index rising by 10.78% and the German DAX index by 14.98% year-to-date [9]. - The increase in government spending will likely lead to a rise in bond yields due to higher supply in the bond market, with German 10-year bond yields potentially surpassing the 3% mark [9]. - The expansionary fiscal policy may also exert upward pressure on inflation, influencing the European Central Bank's monetary policy decisions [9]. Historical Context - The shift in Germany's fiscal policy marks a departure from the austerity measures adopted following the 2008 financial crisis and the subsequent European debt crisis, which had constrained fiscal expansion [10]. - The new fiscal approach could signal a broader shift in Europe towards more aggressive fiscal policies, potentially reversing the trend of economic divergence between Europe and the U.S. [10].