07:54 AM EDT, 09/04/2025 (MT Newswires) -- Since the COVID-19 shock, the European Union has undergone significant changes, with the significant change in the fiscal position in fiscally conservative Germany, the most recent change, said Deutsche Bank.

The German governing coalition has committed to a substantial fiscal stimulus of almost 20% of gross domestic product by the end of the decade, a fiscal boost comparable with the fiscal transfer during German reunification, wrote the bank in a note to clients.

Since the start of this year, the Deutsche Bank forecast for German GDP growth over 2025-2027 has been revised upwards by almost two percentage points.

Other EU member states don't possess the same fiscal space, but they can benefit from the spillover effects of Germany's fiscal expansion, stated the bank.

The European Central Bank's June staff forecasts assumed the German fiscal easing would add 0.25pp to eurozone GDP growth cumulatively over 2025-2027.

Deutsche Bank believes the impact could be stronger. First, Germany has accelerated its spending plans since the June staff forecasts. The direct contribution of German spending to eurozone GDP in 2025-2027 could now be as much as 0.5pp of GDP.

The indirect contribution - the spillover growth effects through various channels, including trade and confidence, and taking account of the composition of German spending and its position in the business cycle -- could be worth at least another 0.2pp of GDP, for a combined direct/indirect impact of about 0.75pp of eurozone GDP, according to the bank.

A recent ECB paper found that the spillover effects can be much smaller, added Deutsche Bank. However, this was largely because monetary policy was assumed to tighten in response to the fiscal easing.

Without the monetary tightening, the spillover effects are more significant and broadly in line with Deutsche Bank's estimates above.

In other words, given the scale of fiscal easing in Germany and the likelihood of spillover growth effects, it isn't unreasonable to think that over the next year, the monetary policy debate will be shifting from risks of easing to risks of tightening.

In Deutsche Bank's recently revised ECB view, 2% is the terminal rate, with a further easing only a risk and fiscal easing is a key reason why the bank sees a hike at the end of 2026.