Europe
German economic recovery delayed until 2026, new forecasts show
Germany’s leading institutes expect a slight recovery in the German economy in 2026 at the earliest, but even this will come at a heavy price.
Signs of hope for the German economy from a few months ago have already vanished. Leading economic research institutes lowered their economic forecasts for 2025 on Thursday.
According to an analysis in Handelsblatt, the Kiel Institute for the World Economy (IfW) now predicts that gross domestic product (GDP) will grow by only 0.1%.
The Essen-based Leibniz Institute for Economic Research (RWI) forecasts 0.2% growth, while the Ifo Institute also predicts 0.2% growth. The Halle Institute for Economic Research’s (IWH) growth forecast is also 0.2%.
At the beginning of the summer, they were forecasting average growth of around 0.3% for 2025.
The main reason for the downward revision is that the government’s stimulus measures have been less effective than previously predicted, and the electricity tax was reduced only for industry.
The institutes do not expect another recession—a contraction of economic output for two consecutive quarters—within this year.
Following a 0.3% fall in GDP in the second quarter, minimal growth is expected from the third quarter onwards.
However, according to the forecasts, there will be no stronger momentum after that.
This is not good news for the federal government. Chancellor Friedrich Merz had promised an “economic turning point” and made a return to growth his most important goal.
Germany’s GDP is currently at a level similar to that of 2019, before the coronavirus pandemic and the war in Ukraine.
“The driving forces for a self-sustaining recovery are still weak,” says IfW chief economist Stefan Kooths.
The low probability of this situation changing this year is likely to intensify debates within the federal government about economic policy reforms.
Although the institutes expect more growth in the years after 2025, a closer look at five points in the forecasts shows that this is no reason for enthusiasm.
1. The hope for growth: Revival will only come in 2026
Germany may experience a revival again starting next year.
The IfW expects growth of 1.3% in 2026. The institute’s initial forecast for 2027 is 1.2%.
The RWI forecasts 1.1% growth in 2026 and 1.4% in 2027.
The Ifo Institute expects 1.3% growth next year and 1.6% the year after.
The IWH, however, offers a much more pessimistic forecast, predicting 0.8% growth for 2026 and 0.6% for 2027.
The labor market will be the biggest beneficiary of this. Although the unemployment rate is still at 6.3% this year, it is projected to fall to 5.8% by 2027.
Compared to the forecasts made at the beginning of the summer, this still represents a setback. At that time, the institutes were expecting average growth of around 1.5% for next year.
2. Growth is financed by the state
In addition, next year’s revival will not only be smaller but will also come at a high price.
The federal government is artificially stimulating growth by significantly increasing debt in infrastructure and defense, and through energy price subsidies, super-depreciation for companies, and tax cuts for the restaurant sector and senior citizens.
The IfW estimates that the government will pump an additional 42 billion euros into the economy in this way by 2026. The forecast for 2027 is 22 billion euros.
According to the IfW’s calculations, the government’s expansionary fiscal policy alone accounts for 0.6 percentage points of the expected growth next year. In 2027, this figure will be 0.3 percentage points.
The RWI’s figures are similar: the institute estimates that government stimulus will boost growth by about 0.5 percentage points in both years.
The problem is that increased government spending does not automatically increase the economy’s growth potential. The numerous contracts the government will award may not lead to an expansion of production capacity but could instead cause prices to rise.
Germany is particularly exposed to this situation because the supply of additional labor is shrinking due to demographic change, and bureaucratic burdens and insufficient digitalization make capacity expansion unattractive.
“In the long run, state investments cannot replace private sector activity,” says RWI Chief Economist Torsten Schmidt.
This also overshadows the joy over the falling unemployment rate: new jobs are mostly being created in the government-related service sector, which is significantly less productive than German industry, where job losses continue.
At the same time, government spending is leading to significantly higher borrowing: according to the RWI, the general public deficit ratio—the ratio of the public sector’s annual new debt to economic output—will rise from 2% this year to 3.6% by 2027.
There is another special effect: in 2026, the number of working days will increase significantly, for example, because public holidays will more frequently fall on weekends. This effect accounts for another 0.3 percentage points of the projected growth in 2026.
“Without these effects, the remaining recovery would be extremely weak, so one cannot speak of a self-sustaining upswing,” write the IfW experts.
When these two effects are not taken into account, only 0.4% GDP growth remains as the “real recovery” in 2026.
The adjusted growth for 2027 is 0.8%. According to the RWI’s assumptions, the adjusted GDP change is only 0.3%. In 2027, this rate will be 0.8%.
The state-led recovery is also confirmed by private sector figures. According to the RWI, private sector investment in equipment will decrease by 2.3% in 2025 and will show only a moderate recovery of 2% and 1.7%, respectively, in the following years, despite improved depreciation conditions.
In contrast, government investment in equipment will increase by about 11% to 22% during the same period. Private consumption will not increase by even 1% next year and the year after, partly due to a slowdown in wage growth.
3. Brakes on growth: Underutilization of capacity
Apart from the record level of state orders, the economic environment remains complex.
There are several developments that hinder a “real revival” and cause German companies to produce far less than they currently could. According to Handelsblatt, the underutilization of capacity is among them.
One reason for this is the tariff agreement for exports to the US. The uncertainty surrounding this and the 15% tariffs are negatively affecting Germany’s exports, one of its most important activities.
According to IfW calculations, US tariffs will reduce economic output by 0.3% in 2025 and 2026, which is equivalent to 13 billion euros.
Another risk is the tension in international financial markets. Risk premiums on government bonds have increased significantly in recent days.
4. Industrial capacity is shrinking
On the other hand, an improvement in external conditions alone will not be enough for Germany to experience a real revival again.
The reason for this is that, parallel to the underutilization of the German economy’s capacity, the structure of the economy is also changing.
Production capacities are not only being underutilized but are apparently being permanently reduced. This means that even if the German economy returns to normal capacity utilization, higher growth rates may no longer be possible.
This is particularly true for industry. The value added of industry is currently more than 4% below the 2019 level. The IfW writes, “In this context, the extremely low capacity utilization may indicate that there is less room for economic recovery and instead points to a further reduction in production capacity.”
According to the RWI, another piece of evidence for this is that although companies’ business expectations for the next six months have recovered slightly, they still assess their situation as poor.
According to the economists, companies are pinning their hopes more on government programs than on an improvement in local conditions.
5. Reforms to slow down structural change
According to the institutes, “structural reforms” that allow for capacity development are necessary to stop this trend.
If this happens, the numerous government contracts resulting from new debt could also ensure that this leads to sustainable growth.
The economists primarily recommend reforms for the social security systems and energy policy. RWI expert Schmidt says, “The government’s spending programs can stabilize the economy in the short term, but they do not solve the fundamental competitiveness problems of the German economy.”
In social policy, it is argued that systems should be designed to encourage more citizens to work in order to slow the decline of the working population for demographic reasons.
According to the institutes, the priority in the energy sector should be to lower energy prices in Germany and increase the security of supply to stop the migration of companies to countries with better energy resources.
Experts believe that structural regulations in the energy market are more important than energy price subsidies.
Europe
Fico accuses Merz of blackmail over threat to veto EU budget
Slovak Prime Minister Robert Fico has hit back after German Chancellor Friedrich Merz threatened to veto the EU budget unless funding for Ukraine is secured.
Merz said he would block the EU’s seven-year budget if no agreement is reached on financial assistance for Ukraine.
The chancellor’s intervention has angered Central European leaders who are net beneficiaries of EU funds but do not want to take part in the next round of funding to support Ukraine’s war effort.
“What the chancellor is doing is typical blackmail, and I will not bow to it,” Fico told reporters in Bratislava.
Fico spoke alongside his Czech counterpart, Andrej Babiš, whose government has refused to participate in a future loan to Ukraine.
“I do not know why he said this,” Babiš said, referring to Merz’s stance.
Merz wants EU leaders to discuss Ukraine’s financing needs at a summit in Dublin on Friday.
In a letter to European Council President António Costa, who will chair the meeting, obtained by The Guardian, Merz wrote:
“We must maintain our support for Ukraine in its struggle to defend itself. This is our shared vital interest. Yet bilateral aid provided to Ukraine is distributed unevenly, with the burden shouldered mostly by only a few member states.”
The EU agreed last year to provide a €90 billion loan to Ukraine, intended to cover two-thirds of its military and civilian spending for 2026 and 2027.
Since then, however, Russia’s relentless bombardment has placed a heavier financial burden on Kyiv, prompting President Volodymyr Zelenskyy to ask for €70 billion to plug the budget deficit.
The EU has endorsed Zelenskyy’s figures and pledged to find €45 billion. Ukraine’s other allies, such as Britain and Canada, are expected to cover the rest.
Last year, Merz launched an initiative to tap €210 billion in frozen Russian state assets held in the EU, but the plan fell through due to opposition led by Belgium, which holds most of the funds in Brussels.
The €90 billion loan was the backup plan. Having opted out of that loan, Hungary, Slovakia, and Czechia indicated that they would not take part in the next round either.
Bulgaria joined these three member states following the election of Prime Minister Rumen Radev last April.
The question of funding for Ukraine is now spilling over into the fraught negotiations on the 2028-34 EU budget.
Germany, the largest net contributor, wants substantial cuts to the proposed budget and opposes the EU providing generous funding to member states that refuse to contribute to Ukraine’s financial needs.
Merz states in his letter that a “collective commitment without exceptions” is a “fundamental prerequisite” for closing Ukraine’s financing gap and for “discussing other matters, particularly those with financial implications.”
He also notes that, in the context of the EU’s next seven-year budget, known as the Multiannual Financial Framework, all member states must contribute to a “robust” financial perspective for Ukraine from 2028 onwards.
A German government official said:
“For the Multiannual Financial Framework (MFF) to be successfully concluded, it is vital that all EU member states provide financial support to Ukraine.”
Berlin is also aiming to shift decision-making on funding for Ukraine from unanimity to qualified majority voting, in an effort to prevent a single government from blocking EU decisions.
The letter reflects mounting frustration among the EU’s northern member states, Ukraine’s most generous backers, over lower contributions from other EU countries in Central and Southern Europe.
The task of brokering an agreement on the budget falls to Costa, the former Portuguese prime minister.
Costa wants a deal by the end of the year, ahead of elections in France, Poland, and Italy in 2027 that could complicate the process.
A spokesperson for Costa confirmed receipt of the letter without elaborating on details. “President Costa will dedicate time to the Ukraine issue at the informal European Council meeting in Dublin this week,” the spokesperson said, adding that funding for Ukraine would be addressed at a dedicated summit on the EU budget scheduled for 26-27 November.
Europe
EU expects next Israeli government to adopt less aggressive posture
The EU expects the next Israeli government to mend its “difficult relationship” with Brussels and adopt a more constructive approach toward Gaza and illegal settlements.
Israeli President Isaac Herzog tasked Gadi Eisenkot, the leader of the anti-Netanyahu bloc, on Sunday with forming a government.
Eisenkot stated that the country faces a “catastrophic diplomatic crisis” as traditional allies begin to reassess their relations with Israel.
Speaking to Rapporteur, several European diplomats stationed in Tel Aviv said they expect ties to get back on track.
“Whatever government comes in, we can try to revitalize relations because Israel is clearly a very important partner,” one European diplomat said, adding that Brussels expects the next administration to be “less aggressive”.
The diplomat noted that relations with Europe are currently “not very good”.
Israel cut off communication with Kaja Kallas, the EU high representative for foreign affairs and security policy, after Rapporteur revealed in June that she had compared Israel to apartheid-era South Africa during a visit to Mexico.
The diplomat stated that this decision, taken ahead of elections, was political in nature. A second European diplomat based in Brussels explained that the announcement came only a few days before an official visit by Dubravka Šuica, the European commissioner for the Mediterranean.
“This could have been interpreted as a tactic to divide Europe, but Israel had asked Kallas to deny the report; she did not do so,” the second diplomat said.
Brussels has repeatedly voiced its frustration with Israel over the humanitarian crisis in Gaza and the expansion of West Bank settlements.
However, EU governments blocked almost all sanctions proposed by the European Commission.
A third diplomat said opposition parties would “almost certainly take the issue more seriously” when it comes to tackling violence by West Bank settlers:
“We see Palestinians being expelled from their homes and new illegal settlements being built in the West Bank. There is a reluctance on the part of the current government to address this issue, which causes problems in our relations.”
The new government is expected to ease pressure on Palestinians and halt construction of the E1 settlement project, a controversial plan to build settler housing in the West Bank east of Jerusalem.
“They will probably try to deal with the problem of extremist settlers in the West Bank,” the diplomat added.
On Gaza, the diplomat described the situation as “a complete nightmare”, with two million Palestinians crowded into an area that accounts for roughly 35% of the territory.
“There are not enough tents for the winter, and not enough vaccines are reaching the area despite an increase in diseases,” the diplomat said.
The European official argued that Donald Trump’s peace plan met all the conditions for Europe. Although the EU had much to offer, neither the US nor Israel appeared interested in EU involvement in the process.
“We are currently training Palestinian police in the West Bank, and if permitted, we could do the same in Gaza,” the diplomat said.
The diplomat disclosed that Israel had agreed with Šuica that Europe would finance two projects aimed at improving sewage and water infrastructure in Gaza, continuing:
“However, none of these projects has started yet because there is a serious problem with dual-use goods. Getting materials into Gaza is very difficult because the Israelis say they could be misused if they fall into the wrong hands of Hamas.”
Israel insists that Hamas must be disarmed before subsequent phases of Trump’s plan can proceed.
With disarmament unlikely to happen in the near term, the EU argues that certain measures can be carried out in parallel.
“We can begin rebuilding sanitation systems in Gaza. We can start building desalination plants. We can begin providing energy and water to Gaza,” one diplomat said.
While Brussels hopes for progress on Gaza and the West Bank, it maintains that expectations regarding the establishment of a Palestinian state need to be “managed”.
The EU continues to advocate a two-state solution, yet most leading Jewish parties oppose the creation of a Palestinian state.
The diplomat noted that the next Israeli government will likely have “a very slim majority and not much room for manoeuvre”.
There is also a “major misunderstanding” between the EU and Israel that must be addressed. According to the diplomat, Europeans fail to recognize the “psychological impact” of 7 October on Israelis.
“This event changed the country and made the two-state solution even more distant than before,” the diplomat said.
In return, some Israeli politicians believe Europe has betrayed Israel despite what they view as a fight against “Islamist terrorism”.
“Their argument is that European politicians are somewhat afraid of the Muslim population in Europe,” the European diplomat said.
Europe strongly opposes Iran and the possibility of Tehran acquiring nuclear weapons, imposing sanctions in response.
However, the diplomat argued that the EU would not participate in a war because it lacks a common army:
“We are a diplomatic and economic power, which is why we resort to sanctions and diplomacy. The expectation that we would take part in a military operation is unrealistic.”
Europe
Germany threatens EU budget veto over long-term Ukraine aid
Germany has threatened to veto the European Union’s joint budget for the 2028-2034 period, which is currently under negotiation, unless every member state commits to providing financial support to Ukraine in 2027 and subsequent years, German Chancellor Friedrich Merz warned.
According to a report by the Financial Times (FT), Chancellor Merz set out Berlin’s condition for the budget talks in a letter addressed to European Council President António Costa.
In his letter, Merz wrote: “A collective commitment that every single one of us, without exception, will make a fair contribution to closing Ukraine’s budget deficit is an indispensable prerequisite for resolving this budget issue and, in particular, for addressing subsequent matters that carry financial implications.”
The German Chancellor stressed that a formula backed by all member states must be established to provide Ukraine with a reliable, multi-year financial perspective starting from 2028.
Merz also insisted that any agreed solution must cover the interest payments on debts incurred to finance the assistance provided to Kyiv.
Conversely, several countries within the bloc have cut financial aid to Ukraine, and the number of capitals adopting this stance is projected to rise next year.
In December 2025, Hungary, Slovakia, and the Czech Republic approved the EU’s 90 billion euro loan package for Kyiv only on the condition that they would not contribute to its costs themselves.
Alongside these three countries, Bulgaria has also stated that it does not plan to participate in subsequent financial assistance packages for Ukraine.
In France, far-right leader Marine Le Pen, who could potentially win the presidential election scheduled for spring 2027, recently told the FT that Paris has run out of funds.
Le Pen assessed: “The honest approach is to tell Mr Zelensky clearly, and even warn him: ‘Look, we cannot do more. We have already allocated the 90 billion euro EU loan, in which France’s share amounts to 18 billion euros. 18 billion euros is genuinely a huge amount of money.'”
The EU’s 90 billion euro loan, covering the 2026-2027 period, aims to meet two-thirds of Ukraine’s financing requirements.
Brussels expects the remaining 45 billion euros to be covered by other partners, including Canada, the UK, Norway, Japan, South Korea, and Australia.
Germany remains the largest net contributor to the EU budget.
In contrast, the four Eastern European countries seeking to avoid financing Ukraine rank among the largest net beneficiaries of the bloc’s budget.
Leveraging this balance, Chancellor Merz aims to use his influence in the EU budget negotiations to secure uninterrupted support for Kyiv in 2027 and the years beyond.
According to the FT, Berlin is also demanding that future aid packages be decided by qualified majority voting rather than unanimity, which is required under the current system.
A German government spokesperson told the newspaper:
“The issue of Ukraine’s financial needs must be resolved within the framework of the next EU budget. Financial support for Ukraine from all EU members is decisive for the successful conclusion of the budget talks.”
-
Diplomacy1 week agoSecular dress code dispute exposes deeper Türkiye-Azerbaijan strains
-
Russia2 weeks agoUS and Russia weigh energy deals and corporate return in peace talks
-
Europe2 weeks agoMerz visits Asia to seek new markets for German defence firms
-
Middle East2 weeks agoUS warns Gulf allies of possible Iran strikes after midterms
-
Opinion2 weeks agoGaza exposes the myth of the “most moral army in the world”
-
Europe5 days agoEU urges citizens to prepare 72-hour survival kits for crises
-
America2 weeks agoDemocrats target Trump-Putin Russian diesel deal with legal push
-
America2 weeks agoBolsonaro reportedly leaves Brazil on jet linked to scandal-hit firm
