Newly elected German leader Friedrich Mertz proposed a large-scale fiscal stimulus plan to promote economic growth and strengthen European defense.

Mertz's plan includes:

1. Lift the debt limit on the defense budget imposed by the German Constitution and adopt large-scale fiscal expansion;

2. Establish a 500 billion euro (approximately 545 billion US dollars) debt financing fund for infrastructure construction and military upgrades;

3. Promise unlimited investment to ensure national security and challenge Germany's long-standing tradition of fiscal prudence.

The market responded positively to the plan: the yield of German treasury bond had the largest weekly increase since the reunification in 1990, indicating that the market expected the German government to borrow heavily; The euro rose 2.3% against the US dollar in a single week, recording its best performance since 2009, reflecting investors' optimistic expectations for the economic outlook in Europe;

The confidence index of German DAX index business managers has reached its highest level in three years, indicating the support of companies for fiscal expansion.

Germany's fiscal spending plan may become a 'game changer' in the global market. "- Benoit Anne, Managing Director of MFS Investment Management

The strong rebound of the euro indicates that the market is optimistic about the economic prospects of Germany and the entire eurozone. However, the sustainability of the euro's rise still depends on whether Germany's fiscal policy can be implemented.

Due to the fiscal stimulus plan, investors are confident in the recovery of the German economy, which is expected to drive growth throughout the eurozone. Economists have raised their expectations for German economic growth in 2026-2027, which may accelerate the pace of recovery in the eurozone.

The Federal Reserve may enter a cycle of interest rate cuts, while Germany's fiscal expansion will help enhance the economic momentum of the eurozone and attract global capital inflows into the European market. European Central Bank officials have recently stated that a stronger euro can help alleviate imported inflationary pressures, but if it appreciates too quickly, it may affect export competitiveness.

If Mertz's fiscal plan fails to pass, the market may quickly adjust its expectations, and the rise of the euro may be difficult to sustain.

The German economy still faces structural problems, such as sluggish manufacturing and high energy costs, and it remains uncertain whether short-term fiscal stimulus can bring long-term growth.

The rise of the euro is mainly driven by expectations of German fiscal policy, but if policy implementation is hindered, the upward trend may be difficult to sustain. "- Simona Delle Chiaie, Bloomberg Economics analyst

The latest poll shows that only 38% of German citizens believe that Merz is suitable for the position of Chancellor, while 52% hold a negative attitude.

Respondents' concerns about Germany's economy and national security intensified. 82% of Germans said they no longer regard the United States as a reliable ally, and 50% believed that if Russia wins in Ukraine, NATO countries may become the next target.

Germany's current fiscal decisions are a 'win or lose all' showdown. "- Carsten Brzeski, Global Macro Research Director at ING

Editor's viewpoint:

Mertz's fiscal expansion may alter the trajectory of the German economy and reshape the global investment landscape:

The Trump administration downplays NATO commitments and promotes more protectionist economic policies, forcing Germany to take on more European security responsibilities; The UK has moved closer to Europe due to changes in US policies, and Germany may also take this opportunity to strengthen its leadership position in the EU.

Due to the possibility of the Trump administration triggering a slowdown in the US economy, global investors are shifting their funds towards Europe; The strength of the euro indicates that investors' confidence in the European economic recovery is on the rise.

If the euro continues to rise, it may weaken the export competitiveness of Germany and the eurozone, putting pressure on the manufacturing industry; Whether Germany will further expand its fiscal spending in the future will determine the sustainability of the appreciation of the euro.