Germany

Cautious signs of recovery due to public investment

The big change came in 2025. Following the federal election in February, the Bundestag revised the constitutional debt brake, allowing defence and security expenditures exceeding 1% of GDP to be exempted from its rules. Additionally, a special EUR 500 billion investment fund was created to support infrastructure and climate protection. Of this amount, EUR 100 billion is earmarked for the federal states (Bundesländer). The fund is set to run over a 12-year period. These measures mark a significant departure from Germany’s traditionally strict disciplined fiscal approach. To further support businesses, the Bundestag introduced the so-called “Investment Booster”. This allows companies to apply a depreciation rate of 30% per year over three years for investments in machinery and equipment, instead of the standard linear method. Electric vehicles used for commercial purposes will also benefit from accelerated depreciation. From 2028, corporate tax rates are set to decrease by one percentage point annually from the current 15%, reaching a permanent rate of 10% by 2032. Furthermore, beginning in January 2026, the new government plans to permanently reduce electricity taxes for manufacturing and agricultural enterprises and to lower grid fees. While these measures have already significantly improved business sentiment since February 2025 - albeit from a very low level - this has not yet translated into a broader economic recovery more than midway into 2025. A genuine upswing away from the mild recession of recent years is not expected to materialise by 2026. In the defence sector, existing companies are already operating at full capacity, meaning that additional procurement will take time. There is also a shortage of personnel to manage the expansion. In terms of infrastructure, new construction projects typically require several quarters or even years of planning before they can make a tangible impact. Hence, the short-term economic recovery should derive mainly from higher company investments that were on hold during the last few quarters due to elevated planning uncertainty and are likely to be supported by tax deductions and the outlook for state investments.

Private consumption (52% of GDP) should pick up cautiously in the second half of 2025, but should mainly take place in 2026. Real wages have been rising since Q3 2023 and have helped to claw back the purchasing power losses from the energy-price crisis that occurred from 2021 to 2023. In 2025, the growth rate of real wages fell back to normal levels to around 1.5% in the first half of the year, which is very similar to the rates of pre-pandemic times, reflecting that inflation and wage trends are slowing in sync. Furthermore, the savings rate fell noticeably from a peak of 11.8% of disposable income in Q3 2024 to 10.4% in Q1 2025, which is again in line with the pre-pandemic level. The modest revival of private consumption should be accompanied by a timid recovery in construction, on back of a more favourable financial situation than in recent years. By mid-2025, the ECB had cut its deposit rate by 25 basis points at every single meeting since June 2024, bringing the rate down from 4.0% to 2.0% in June 2025, which is considered the neutral level. Given the low level of economic growth in the eurozone, combined with the fact that inflation is verging on the 2% target, two more rate cuts of 25 basis points are expected for 2025. Further out, the ECB should keep the rate on hold, but with two more cuts possible in 2026. Corporate investment should also benefit from the lower interest rate level, on top of the tax deductions and lower energy costs, especially in 2026. Foreign trade, however, will, for now, remain the big unknown for 2025-2026. Although there is a first agreement between the US and EU on future tariffs of 15% for EU products in the US, there are still a lot of uncertainties around the details and the implementation. The US is Germany’s largest export partner, accounting for 10% of all goods exports, and this could have a significant negative impact, especially if Germany’s other leading trading partners such as China, the Netherlands and France are also negatively affected and exhibit lower demand for German products.

Fiscal policy does a U-turn

After years of fiscal restraint, a new consensus has emerged in German society: borrowing is now considered acceptable, provided it is directed toward future-oriented investments. Accordingly, the 2025 federal budget provides for record investments tallying EUR 115 billion, which is a 55% increase compared to 2024. These funds are primarily earmarked for rail infrastructure, educational and childcare institutions, housing projects, digitalisation, and – under the new strategic framework – climate protection and defence. Most of the increased spending is expected to start materialising during the final quarter of 2025. In 2026, investment levels are projected to rise further, with infrastructure and climate-related expenditure set to increase by 56% year-over-year. The German armed forces are also expected to expand their spending. The latter increased from 1.9% of GDP in 2024 to 2.4% in 2025 (including pensions) and should gradually increase to 3.5% by 2029. Although the government has announced cost-saving measures (notably directed towards the public administration), these are far from sufficient to offset the increased financial requirements. As a result, the federal budget deficit is expected to exceed the 3% threshold by 2026, and public debt levels will rise again. However, the opening of an EU deficit procedure is not anticipated. The European Union is expected to grant exceptions, particularly for defence-related expenditures.

Germany’s current account surplus is largely driven by its trade in goods. The future trajectory of this balance remains uncertain and will depend heavily on the reaction of US importers on the new US tariffs on EU products as well as possible competition effects with other countries regarding trade with the US. In general, the goods trade surplus should settle at a somewhat l lower level than in previous years.

Small Grand Coalition vs. strong opposition

Snap elections were held in Germany in February 2025 after the former "traffic light" coalition comprising the Social Democratic SPD, the environmentalist Greens, and the liberal FDP collapsed following the 2025 federal budget row. Garnering 28.5% of the vote, the Christian-Democratic CDU-CSU emerged as the strongest party after gaining 4.4 percentage points compared to the 2021 election. The far-right Alternative for Germany (AfD) became the second-largest force in the Lower House with 20.8%, marking the highest result in its history. These gains came largely at the expense of the former governing parties: the SPD received 16.4% (down by 9.3 pp), the worst result in its 162-year history, the Greens 11.6% (-3.1 pp.), and the FDP just 4.3% (-7.1 pp.). The latter failed to clear the 5% threshold required to enter Parliament and consequently lost its seats. A similar fate befell the left-conservative BSW, which also failed to secure representation. In contrast, the Left Party gained support, reaching 8.8%. Before the outgoing Bundestag dissolved and the new one convened, CDU leader and future Chancellor Friedrich Merz succeeded in persuading the SPD and the Greens to join the CDU/CSU in amending the German constitution. Against the backdrop of the ongoing war in Ukraine, the debt brake was modified to allow defence and security expenditures to be excluded, barring a maximum of 1% of GDP. Additionally, a special fund for infrastructure and climate protection was created. Amending the Constitution requires a two-thirds Parliamentary majority, which was still achievable in the outgoing Bundestag. In the newly elected Parliament, however, over-partisan cooperation has become more difficult. The new government marks a return to a "Grand Coalition" between the CDU/CSU and the SPD, though it only holds a relatively narrow majority of 52% of the seats. The opposition is led by the AfD, which holds 24% of the seats, the Greens with 13% and the Left Party with 10%, giving them enough leverage to block further large-scale initiatives. The CDU/CSU has pledged to not cooperate with either the AfD or the Left Party, making further constitutional reforms unlikely. As matters stand, the new government appears to be relatively stable, and the next federal election is not scheduled until 2029.

Payment

Bank transfer (Überweisung) remains the most common, means of payment. All leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. The SEPA Direct Debit Core Scheme and the SEPA Direct Debit B2B are the newest forms of direct debit.

Bills of exchange and cheques are not used very widely in Germany as payment instruments. For Germans, a bill of exchange implies a critical financial position or distrust in the supplier. Cheques are not considered as payment as such, but as a “payment attempt”: as German law ignores the principle of certified cheques, the issuer may cancel payment at any time and on any grounds. In addition, banks are able to reject payments when the issuing account contains insufficient funds. Bounced cheques are fairly common. As a general rule, bills of exchange and cheques are not considered as effective payment instruments, even though they entitle creditors to access a “fast track” procedure for debt collection in case of non-payment.

Debt Collection

Amicable phase

The amicable collection is an essential step to the success of collection management. The collection process generally begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding the debtor of their payment obligations.

According to the law for the acceleration of due payments (Gesetz zur Beschleunigung fälliger Zahlungen) a debtor is deemed to be in default if a debt remains unpaid within 30 days of the due payment date and after receipt of an invoice or equivalent request for payment, unless the parties have agreed to a different payment period in the purchase contract. In addition, the debtor is liable for default interest and reminder fees upon expiry of this period.

Debt collection is recommendable and common practice in Germany.

Legal proceedings

Fast-track proceeding

Provided the claim is undisputed, the creditor may seek order to pay (Mahnbescheid) through a simplified and cost-efficient procedure. The creditor describes the details of their claim and is subsequently able to obtain a writ of execution fairly quickly via the Online-Dunning Service (Mahnportal), direct interfaces or (only for private individuals) pre-printed forms. Such automated and centralised (for each Bundesland, federal state) procedures are available all over Germany.

This type of action falls within the competence of the local court (Amtsgericht) for the region in which the applicant’s residence or business is located. For foreign creditors, the competent court is the Amtsgericht Wedding (in Berlin). Legal representation is not mandatory.

The debtor is given two weeks after notification to pay their debts or to contest the payment order (Widerspruch). If the debtor does not object within this timeframe, the creditor can apply for a writ of execution (Vollstreckungsbescheid).

Ordinary proceedings

During ordinary proceedings, the court may instruct the parties or their lawyers to substantiate their claim, which the court alone is then authorised to assess. Each litigant is also requested to submit a pleading memorandum outlining their expectations, within the specified time limit.

Once the claim has been properly examined, a public hearing is held at which the court passes an informed judgement (begründetes Urteil).

The losing party will customarily bear all court costs, including the lawyer’s fees of the winning party to the extent that those fees are in conformity with the Official Fees Schedule (the Rechtanwaltsvergütungsgesetz, RVG). In the case of partial success, fees and expenses are borne by each party on a pro rata basis. Ordinary proceedings can take from three months to a year, while claims brought to the federal Supreme Court can reach up to six years.

An appeal (Berufung) may be brought against the decision of the Court of First Instance if the objected in exceeds €600. An appeal will also be admitted by the Court of First Instance if a case involves a question of principle or necessitates revision of the law in order to ensure “consistent jurisprudence”.

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Enforcement of a Legal Decision

Enforcement may commence once a final judgement is made. If debtors fail to respect a judgment, their bank accounts may be closed and/or a local bailiff can proceed with the seizure and sale of their property.

For foreign awards, in order to obtain an exequatur, the creditor needs a notarised German translation of the decision which also has to be recognised, an enforcement order of this judgment, and an execution clause. Judgments of courts of EU member states are recognised without further procedure – unless certain restrictions arising from European law are applicable.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

Debtors may attempt to renegotiate their debts with their creditors, which helps to protect debtors from early payment requests. However, the procedure is in the creditors’ interest as it can be faster and tends to be less expensive than formal insolvency.

RESTRUCTURING

Following a petition filed before insolvency court on the basis of illiquidity or over-indebtedness, the court may open preliminary insolvency proceedings, where it appoints a preliminary administration aimed at exploring the chances of restructuring the company. If the administration authorizes this restructuration, it then initiates formal proceedings and nominates an administrator in charge of continuing the debtor’s business whilst preserving its assets.

LIQUIDATION

Liquidation may be initiated upon demand of either the debtor or the creditor provided that the debtor is unable to settle its debts as they fall due. Once recognized through a liquidation decision and once the company has been removed from the register, the creditors must file their claims with the liquidation administrator within three months of the publication.

RETENTION OF TITLE

This is a written clause in the contract in which the supplier will retain the ownership over the delivered goods until the buyer has made full payment of the price. There are three versions of this retention:

simple retention: the supplier will retain the ownership over the goods supplied until full payment is made by the buyer;

expanded retention: the retention is expended to further sale of the subsequent goods; the buyer will assign to the initial supplier the claims issued form the resale to a third party;

extended retention: the retention is extended to the goods processed into a new product and the initial supplier remains the owner or the co-owner up to the value of his delivery.

Last updated: July 2025