Germany Under Strain: Economy, Rearmament, Politics and Markets

by Nato Balavadze

In this paper, we discuss:

• Germany’s longest stagnation since WWII, driven by weak domestic demand, underinvestment, and eroding industrial competitiveness;
• The use of defence spending as an economic strategy, with rearmament rising to 3.5% of GDP but facing deep political resistance;
• A fractured political landscape, as economic insecurity fuels the AfD’s rise and undermines the governing coalition’s legitimacy;
• The growing Franco-German imbalance, with Merz’s failure to win EU support for using frozen Russian assets;
• Market implications, including structural cheapening of Bunds, stalled equity momentum, and a euro increasingly driven by US dynamics.

Download PDF: Germany – January 2026