Start with what changed structurally, because it is substantial. In March 2025, Germany rewrote its constitutionally enshrined debt brake, exempting defense spending above 1% of GDP from borrowing limits and creating a €500 billion off-budget fund for infrastructure and climate investment. That is not a rounding error in German fiscal history, it is the end of nearly two decades of self-imposed austerity. The IMF now estimates Germany's fiscal thrust at roughly 1% of GDP for 2026, and Goldman Sachs attributes close to half of the country's expected 2026 growth directly to that stimulus. Danske Bank's tracking shows combined German defense and infrastructure spending up about 70% year-on-year in the first half of 2026 alone.
This is precisely the kind of tailwind that shows up in hard data rather than sentiment. The eurozone's second-quarter GDP grew 0.4% quarter-on-quarter, double the 0.2% consensus forecast, even as the region absorbed elevated energy costs and Middle East disruption. Add in valuations that were already discounted relative to the US, a genuine rotation narrative as investors grow wary of how concentrated US market gains have become in a handful of AI-exposed names, and you have a coherent case: Europe isn't rallying despite the war, it's rallying because a decade-overdue fiscal engine finally turned on, and that engine is powerful enough to absorb the war's drag.