Germany's Debt to Reach 74% of GDP by 2030 Amid Spending Surge

Germany's debt is expected to rise to 74% of GDP by 2030 due to increased spending on defense and infrastructure. The government's core budget flexibility will decrease, with expenditure on interest payments and social security rising. Structural reforms are necessary to maintain room for maneuver. An infrastructure fund could raise Germany's growth potential to 1% from 0.7%. The growth effect of defense spending will be moderate.

Germany's fiscal policies are poised to significantly impact the country's economy and its stock market, as evidenced by the recent surge in the DAX index. With an expected rise in debt to 74% of GDP by 2030, driven by increased spending on defense and infrastructure, Germany's core budget flexibility is set to decrease. This article explores the implications of these fiscal changes on the DAX and the broader German economy.

Germany's Fiscal Surge

Germany's fiscal policy has been characterized by a significant increase in spending on defense and infrastructure. This spending, which is expected to reach €152.8 billion by 2029, represents a 3.5% GDP target under NATO's Readiness 2030 initiative [1]. Additionally, the €166 billion infrastructure fund (2025–2029) prioritizes projects such as railways, smart grids, and defense-adjacent projects like hydrogen hubs. These investments are aimed at boosting Germany's growth potential and positioning it as a European growth hub.

Impact on the DAX

The DAX index has shown remarkable resilience in the face of global trade tensions and geopolitical realignments. As of June 2025, the DAX has a year-to-date return of 18.47%, underscoring Germany's strategic pivot toward AI-driven industrial innovation, trade diversification, and defense-infrastructure spending [1]. The DAX's outperformance can be attributed to its 23.5% weighting in industrials, which includes giants like Siemens, ThyssenKrupp, and Bosch. These firms are leveraging AI to slash costs and dominate sectors like EV manufacturing and smart infrastructure.

Risks and Opportunities

While the fiscal surge presents opportunities for growth, it also carries risks. U.S. tariff exposure remains a concern for German automakers, although reshoring production mitigates some exposure. Additionally, Germany's national debt is projected to hit €847B by 2029, with interest payments consuming 10% of the budget. This could crowd out social spending, sparking political pushback. Despite these risks, the DAX's structural advantages—AI integration, trade diversification, and EU infrastructure funds—position it to outperform.

Investment Strategy

Investors should focus on sectors poised to benefit from Germany's fiscal renaissance. Defense contractors like Hensoldt and Airbus, infrastructure engineering firms such as Strabag and Siemens, and AI/supply chain leaders like SAP and Bosch are likely to be key beneficiaries. Energy stocks, however, may present risks due to geopolitical conflicts and EU renewables policies. Hedging strategies, such as using put options, can help protect against cyclical downturns.

Conclusion

Germany's fiscal stimulus and geopolitical realignment are transforming it into a European growth hub. While risks like tariffs and debt loom, the DAX's structural advantages position it to outperform. Investors should focus on construction, defense, and AI-driven industrials, while hedging against cyclical downturns. As the EU's fiscal and defense policies coalesce, German equities may well define the next phase of European equity resilience.

References:
[1] https://www.ainvest.com/news/germany-fiscal-surge-navigating-dax-resilience-geopolitical-crossroads-2507/