Home Insights Macro views Germany’s fiscal shift: A boost to Europe, but U.S. edge remains

Germany’s fiscal shift: A boost to Europe, but U.S. edge remains

Quick takes on capital markets

March 28, 2025 | 2 min read
Seema Shah
Chief Global Strategist

Heading into 2025, U.S. exceptionalism remained a dominant theme. But tech sector struggles, downward revisions to U.S. economic growth forecasts, and Germany’s landmark infrastructure and defense spending package have left investors questioning that assumption. Still, there are reasons to believe U.S. exceptionalism will continue, given skepticism over the EU’s ability to replicate Germany’s fiscal stimulus—and concerns that Europe’s heavy regulation continues to stifle growth. For now, it seems the U.S. will ultimately regain its top position.

Growth forecast revisions
2023-2027

Growth forecast revisions for 2023-2027 in bar graph form
Source: Bloomberg, Principal Asset Management. Data as of March 25, 2025.

At the beginning of the year, U.S. exceptionalism was anticipated to continue. However, recent developments have challenged this notion. The U.S. tech sector, a primary driver of American market performance, faces scrutiny over high valuations and earnings expectations. Growth expectations for the U.S. economy have been revised downward in response to rising policy uncertainty, and policy proposals that have proven to be more severe than widely expected.

In contrast, Germany has enacted a significant spending package, unlocking nearly a trillion euros for defense and infrastructure, signaling the most substantial shift in Germany's fiscal policy since reunification. This expansion, coupled with European equities outperforming the U.S. YTD, has led to questions about U.S. dominance.

Forecasts suggest that while tariffs will subdue German growth this year, there will be a meaningful strengthening in the coming years once the fiscal impulse kicks in. Notably, as it makes up about a third of Euro area GDP, Germany’s expansion should lift broader European growth, although as other EU countries lack the same fiscal capacity they are unlikely to enjoy fiscal stimulus boosts themselves.

However, despite this positive European momentum, U.S. exceptionalism remains intact. Europe still grapples with regulatory and labor market challenges, and the potential impact of U.S. tariffs poses significant risks. Overall, while Europe shows promise, the U.S. retains a strong competitive edge in innovation and economic growth.

For a deeper dive into the possibility of a European revival and U.S. exceptionalism, read A growth revival: the start of European exceptionalism? and 7 reasons why U.S. exceptionalism is only being challenged, not overtaken, by Europe.

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