Germany is about to hold elections, and market investors generally believe that this is an opportunity to adjust fiscal policy and stimulate economic growth. However, strict "debt brake" rules may limit the fiscal space of the new government, putting Germany at a disadvantage in global economic competition.

In recent years, Germany's economic growth has stagnated. According to market research, the German economy has hardly grown since 2019, while the Eurozone as a whole has grown by 5% and the United States has grown by 11% during the same period. Nevertheless, Germany remains the only country in the G7 with a debt to GDP ratio far below 100%. Therefore, against the backdrop of high debt pressures in the UK, France, and the US, the market generally expects Germany to moderately relax its fiscal policy to enhance its long-term growth potential.

The adjustment prospect of Germany's debt policy has attracted much attention, especially in the context of the imposition of tariffs by the United States, Germany's economy may face further pressure. At present, the market is observing whether Germany will relax its "debt brake" rules to expand its spending scale while meeting the rising demand for defense spending.

If there is a country that has the ability to increase borrowing, it is Germany. "- Nicola Mai, Head of European Sovereign Credit Research at PIMCO

Nevertheless, investors remain cautious about Germany's future fiscal policies. According to market research, in January of this year, a survey targeting investors showed that nearly two-thirds of respondents believed that even if the new government relaxed debt restrictions, the adjustment would be relatively moderate.

There is still uncertainty in fiscal reform, and the market may be affected by political uncertainty in the short term. It is expected that the next leader of the German government, Friedrich Merz, may support a limited debt adjustment. However, due to the continued existence of EU fiscal discipline requirements, Germany's spending space is still limited. At present, the "debt brake" rule limits Germany's structural fiscal deficit to 0.35% of GDP, and the market generally predicts that this upper limit may be raised to 1%.

Even if the debt brake cap is raised to 1%, it is not enough to make up for the investment gap of the past decade. "- ING economist

Euro to US dollar: Fiscal policy may become a key influencing factor

The adjustment of Germany's fiscal policy not only affects the domestic economy, but may also directly affect the trend of the euro against the US dollar. In the past few years, the euro has continued to weaken, falling from a high of 1.25 in 2018 to nearly 1.00 in February of this year. Market analysis suggests that this trend is partly attributed to Europe's relatively conservative policies on fiscal spending and economic growth, while the United States has maintained faster growth under large-scale fiscal stimulus in the past few years.

Europe's policy choices have led to lower growth than the United States, and Germany is one of the important factors in this. "- Kit Juckes, head of foreign exchange strategy at Societe Generale, a French foreign trade bank

Currently, market investors are evaluating whether Germany will adopt a more aggressive fiscal policy. If the German government relaxes debt restrictions and increases spending, it may enhance the economic growth expectations of the eurozone, thereby boosting the euro. But if Germany continues to maintain strict fiscal discipline and the US economy remains strong, the euro may continue to be under pressure.

In addition, there is a certain correlation between the performance of the German stock market and the trend of the euro. Although the DAX index has risen by 45% in the past three years, its valuation relative to the S&P 500 index still has a discount of 38%, indicating that the market still has doubts about the growth prospects of the European economy. If Germany adopts a more proactive fiscal policy, it may not only boost the euro, but also drive the re rating of European stock markets.

If the new government can alleviate market concerns about low productivity, it may lead to a re rating of the market and support for the euro. "- Rameez Sadikot, Portfolio Manager at Antipodes Partners

However, if the adjustment of fiscal policy is limited and the market lacks confidence in Germany's economic growth, the weakness of the euro may continue. Some investors are still bearish on the euro, believing that the strong position of the US dollar is difficult to shake with unchanged German fiscal policy.

I am still bearish on the euro, with a target price of 1.04 for the first half of this year. "- Andreas Koenig, Global Head of Foreign Exchange at Amundi

FXCUE Editor's Perspective

The adjustment of Germany's fiscal policy is not only crucial for the domestic economic recovery, but may also have an impact on the long-term trend of the euro. If the new government adopts a more proactive fiscal policy and increases investment in infrastructure, technological innovation, and defense, the euro may receive support and enhance the overall economic vitality of the eurozone. However, if Germany continues to maintain its fiscal austerity policy while the US economy remains strong, the weakness of the euro may continue. In the future, market investors will closely monitor the policy direction of the German government, especially whether a balance can be found between fiscal discipline and economic growth to avoid further economic weakness in Germany and even the entire eurozone.