A Trillion Euros Awaits Croatian Companies in Four Sectors

Certainly good news, but only a few domestic sectors will be able to participate – economists assess after the final decision of the German parliament that opens the door to flooding the German economy with a trillion euros in fiscal incentives. The new impetus for the German economy should come from what can be freely described as a historic decision by the Bundestag to amend the Constitution. This decision abolished the ‘debt brake’ embedded in the Constitution back in 2009. On Friday, the last parliamentary obstacle fell; the upper house Bundesrat confirmed the Bundestag’s decision. Recall that the ‘debt brake‘ defined that the government in Berlin could take on new loans, or incur new debt, of a maximum of 0.35 percent of GDP in one year. This currently means that Germany is allowed to incur only an additional 15 billion euros in debt.

Positive spillover effect

With the votes of the Christian Democratic Union CDU/CSU, the Social Democratic Party SPD, and the Greens, the Bundestag on Tuesday changed that article of the Constitution with a two-thirds majority. Of the nearly one trillion euros that could now be released, half will go to financing the modernization of the German military, while the other half will go to financing measures to stimulate the economy and restore infrastructure.

As is well known, the largest European economy has been one of Croatia’s leading trading partners for several years. Statistics on trade exchange for the first nine months of last year show that Croatian companies exported goods worth 2.1 billion euros to the German market. However, exports to Germany are stagnating, reflecting the weaknesses faced by the German economy. Recall that German GDP weakened by 0.4 percent year-on-year in the fourth quarter, according to data from the German statistical office Destatis.

The mentioned ties between the Croatian and German economies would mean that at least a small part of that pie will be bitten into by our companies. Primarily industrial and construction companies, due to the expected wave of investments in the German economy and military spending. A significant amount of money certainly suggests a certain positive spillover to companies within the industry, believes Mate Jelić, macroeconomic analyst at Erste Bank.

The importance of forming partnerships

– At this moment, it is too early to give a specific assessment of how this will affect individual Croatian companies. This will depend on the willingness of the companies themselves to respond to challenges, that is, to ensure enough inputs for production in a relatively short time and to timely establish strategic partnerships. It should be noted that numerous companies around the world will try to get involved and profit from the upcoming wave of armament. Existing players within the sector are certainly at an advantage, and we see how some of the largest, such as the German Rheinmetall, intend to transform their two automotive parts factories into factories intended for the production of military equipment for defense – claims Jelić.

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Mate Jelić, macroeconomic analyst at Erste Bank

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Analysts at Raiffeisen Bank say that the increase in fiscal incentives to the German economy and investments in defense should certainly have a positive impact on the growth of the German economy, and to a certain extent on trading partners.

– This also means numerous opportunities for Croatian companies, but it should be kept in mind the capacity limitations, which are particularly pronounced in the short term – emphasize RBA.

Sectorally, the construction industry should benefit the most, with large allocated amounts for the modernization of transport, energy, and digital infrastructure, followed by manufacturers of military equipment and technologies.

– In the energy sector, the emphasis is placed on renewable energy sources and the modernization of electrical networks, given the need to upgrade infrastructure that supports the energy transition. Thus, companies engaged in renewable energy production, network expansion, and energy storage solutions should benefit. Additionally, one of the key components is digital transformation, which also means business opportunities for the technology and telecommunications sector – assess RBA.

Launching the German ‘locomotive’

That bank adds that the reform package will be distributed over several years with the aim of addressing the structural weaknesses that have limited Germany’s economic growth in recent years.

– However, this also means a likely increase in borrowing costs, as well as rising inflation and a potentially negative impact on private investments. Therefore, we estimate that the growth of German GDP could approach rates of around two percent in the medium term – they believe at RBA.

In any case, if Germany, as the economic locomotive of Europe, moves forward again, it will pull along the ‘small wagons’, such as the Croatian economy. Mate Jelić reminds us that historical data shows a clear positive relationship between the growth of the German and our economy.

– Forecasts for the German economy are being revised upwards, and accordingly, it is logical to expect a certain positive spillover to other economies that have strong trade ties with the German economy. Such a strong investment cycle certainly has the potential to mitigate the negative consequences of the trade war – assessed Jelić.