When Friedrich Merz echoed Mario Draghi’s famous words last week, he knew exactly the reaction he would provoke. ‘Whatever it takes’ is no neutral phrase in Europe. It is a statement that takes financial markets back to the euro crisis of 2012, when the then European Central Bank (ECB) president Draghi used those three words to restore confidence in the euro and calm investors.
Where Draghi sought to preserve the single currency, the Christian Democratic candidate for chancellor has deployed the phrase in a different context: Germany’s economy and defence.
So how did Merz arrive at this formulation, and what was the intended message?
According to Michael Hüther, director of the Institut der deutschen Wirtschaft (IW) in Cologne and one of the four economists advising Merz, the statement was no accident.
Speaking with Investment Officer, Hüther confirmed that he is working with Merz on shaping his economic agenda alongside Clemens Fuest (ifo Institute), Moritz Schularick (Kiel Institute for the World Economy), and Jens Südekum (Heinrich-Heine-Universität Düsseldorf). The advisory group was formed after the elections at the initiative of Jakob von Weizsäcker, the current finance minister of Saarland and former chief economist at Germany’s Federal Ministry of Finance.
Germany sends an international signal
Hüther sees Merz’s statement primarily as an international signal.
“It is a strong message to Europe and the world about Germany’s willingness to defend itself,” he explains.
This statement aligns with a broader policy shift that includes a 500-billion-euro investment package—the largest in Germany’s recent history—agreed with the Bundestag’s social democrats. In addition, a package of similar proportions is earmarked for defence, a move designed to break with decades of underinvestment, modernise infrastructure, and bring Germany’s defence spending to a new level.
Hüther emphasises that this is not just rhetoric. His calculations indicate that Germany has underinvested in public infrastructure for more than 25 years and that reaching the European average of about 2,000 euros per capita annually translates into an additional requirement 473 euros per capita per year.
A break with budget orthodoxy?
The key question is whether Merz can truly depart from Germany’s strict budgetary discipline. His predecessor as CDU leader, Angela Merkel, upheld the ‘Schwarze Null’ and Germany’s stringent ‘debt brake’ policy for years.
However, Hüther argues that today’s economic and geopolitical realities demand a different approach.
“The current crisis—marked by geopolitical shifts, an economic slowdown, and an increasingly urgent climate challenge—requires a decisive fiscal response. The German government has a constitutional obligation to provide essential public goods such as defence and infrastructure. This fiscal programme could shift the economy onto a more competitive and secure path.”
Merz’s economic strategy: Keynesian or supply-side?
Merz’s economic strategy incorporates elements of both Keynesian stimulus and supply-side economics. The defence spending boost is an immediate stimulus, expected to generate economic activity in defence-related industries. At the same time, public infrastructure investments are designed to improve long-term productivity.
Hüther and his colleagues estimate that these measures could accelerate German GDP growth to 5 percent as early as next year, far above the European Commission’s current forecast of 1.3 percent.
“We expect GDP growth of 5 percent in 2026 thanks to this surge in investment and industrial production,” Hüther told Investment Officer.
Financial markets take note
Financial markets reacted swiftly to Merz’s announcement. The day after his speech, 10-year German government bond yields surged by 30 basis points—the largest single-day increase since the fall of the Berlin Wall in 1989.
Yet Hüther is unfazed by the rise in borrowing costs.
“If Germany fails to invest in defence and infrastructure, the risk would be even greater,” he says.
Germany’s AAA rating keeps borrowing costs manageable, and Hüther believes that, if investment translates into economic growth, the debt-to-GDP ratio will remain stable and even improve Germany’s lending conditions.
“Relaxing the excessively rigid debt brake is a historic necessity—both in light of the geopolitical threat from Russia and Germany’s chronic underinvestment in infrastructure.”
Tackling structural reforms
While investment is critical, Hüther warns that fiscal expansion alone will not solve Germany’s challenges. Bureaucratic inefficiencies, an ageing workforce, and rigid labour laws remain significant obstacles.
“Demographic change places an increasing burden on public finances. Without urgent pension reform and an increase in working hours, we will not be able to sustain economic growth. It is unacceptable that the Swiss work 100 hours more per year than Germans—that’s two hours per week.”
Further reading on Investment Officer:
- Bund yields spike after Merz vows ‘whatever it takes’ on defence
- German elections: potential boost for the EU bond market
- Europe’s forgotten market: can unloved investments stage a comeback?
