German borrowing costs and stock markets experienced a significant surge on Wednesday morning as investors responded to Berlin’s announcement of an unprecedented increase in spending on defense and infrastructure.
Yields on German 10-year bonds—the eurozone benchmark—rose sharply by more than 20 basis points (0.2 percentage points), reaching just under 2.7% by midday CET. Simultaneously, the DAX, Germany’s primary stock index, climbed 3.7%, effectively reversing the previous day’s 3.5% decline.
Economic ripple effects extended beyond Germany, impacting European markets. The STOXX Europe 600, a broad index measuring European equities, rose by 1.6%, while the euro strengthened by 0.7%, reaching approximately €1.07 against the U.S. dollar.
Seismic Shift in German Fiscal Policy
“The markets are still digesting a seismic shift in German fiscal policy,” noted Sander Tordoir, chief economist at the Centre for European Reform. He added that investors appear to be factoring in both the prospect of relief from U.S. tariffs imposed by former President Donald Trump and upwardly revised economic growth projections.
This market movement follows a landmark budget agreement reached by Germany’s leading political parties. The Christian Democrats (CDU), their Bavarian sister party (CSU), and the Social Democrats (SPD) have backed measures that mark a historic departure from the country’s postwar fiscal conservatism.
Key elements of the budget include a constitutional amendment establishing a special 10-year €500 billion infrastructure investment fund. Additionally, the agreement allows defense spending exceeding 1% of annual GDP to be exempt from the federal “debt brake,” while debt regulations for Germany’s 16 federal states will also be relaxed.
With the CDU and SPD widely expected to form the next German government following last month’s federal elections, the proposed legislation is set to be introduced in the Bundestag next week.
Market and Economic Outlook
A report from Deutsche Bank analysts highlights a critical factor in the budget’s approval—the support of the Green Party, which is essential for the proposal to pass. The bank’s analysts stated that the proposals were unlikely to have been put forward without prior discussions with the Greens, suggesting a high probability of approval.
Tuesday’s announcement also presents a potential upside risk to Germany’s economic growth projections. Deutsche Bank now sees room for its 2026 GDP forecast of 1% to be revised upward. However, risks remain for 2025, with the bank maintaining a conservative 0.5% growth estimate due to ongoing trade uncertainties linked to Trump’s tariffs.
The positive momentum in German and European stocks stood in contrast to developments in the United States. The S&P 500 dropped 1.22% as concerns over the economic impact of Trump’s tariffs mounted. Washington recently implemented 25% tariffs on imports from Mexico and Canada, while duties on Chinese goods were doubled to 20%.
Despite these tensions, U.S. Commerce Secretary Howard Lutnick hinted that partial tariff relief may be imminent. Speaking to Fox Business Network, Lutnick indicated that Trump was likely to negotiate a compromise with Canada and Mexico following discussions regarding enhanced border security measures.
As markets continue to assess the long-term implications of Germany’s fiscal shift, investor sentiment remains buoyant, with expectations of enhanced economic resilience and growth prospects in Europe’s largest economy.
Source:https://www.euractiv.com/
