Germany’s borrowing costs soared on Wednesday, marking the biggest one-day jump in nearly three decades. This came as investors reacted to a groundbreaking deal aimed at reviving the country’s sluggish economy through massive investments in defense and infrastructure.
The yield on Germany’s 10-year Bund climbed 0.25 percentage points to 2.73%, the largest spike since 1997, as markets braced for increased government borrowing. The shift reflects a major departure from Germany’s traditionally conservative fiscal policies, signaling a willingness to spend more aggressively to stimulate growth.
A Paradigm Shift in German Fiscal Policy
Chancellor-in-waiting Friedrich Merz struck an agreement with the rival Social Democrats (SPD) on Tuesday to relax the country’s strict debt rules. The deal includes:
- Exempting defense spending above 1% of GDP from constitutional borrowing limits.
- Establishing a €500 billion off-balance-sheet fund for infrastructure projects.
- Easing debt restrictions for state governments.
Economists at Deutsche Bank described the move as one of the most significant shifts in German economic policy since World War II. The scale and speed of the plan are being compared to the economic overhaul following German reunification in the 1990s.
Goldman Sachs analysts estimate that if implemented swiftly, the package could boost Germany’s economic growth to 2% next year—more than double their previous forecast of 0.8%.
This is a striking reversal from the last two years of economic stagnation, during which Germany’s GDP shrank due to high energy costs, weak investment, and sluggish consumer demand. If successful, the new policies could reinvigorate Europe’s largest economy, potentially setting a precedent for other EU nations struggling with similar challenges.
Markets Respond with Optimism
Financial markets welcomed the news, with the euro rising 1.2% against the U.S. dollar to reach $1.075—its highest level since November. German stocks also surged, reflecting investor confidence in the fiscal expansion plan.
Germany’s DAX index jumped 3%, recovering from Tuesday’s drop caused by U.S. tariff concerns. Infrastructure companies saw some of the biggest gains, with Heidelberg Materials rising 15%, Siemens Energy climbing nearly 9%, and steel giant Thyssenkrupp gaining 13%.
The defense sector also continued its upward trend. Rheinmetall, Germany’s largest defense company, saw its shares rise 5%, while French defense contractor Thales gained 6%. This rally suggests that investors anticipate sustained military spending, further benefiting the sector.
Political Hurdles Could Delay Implementation
While the deal between Merz’s CDU/CSU alliance and the SPD is a major step forward, it still needs support from the Green Party to secure the two-thirds majority required for a constitutional amendment. The Greens have long advocated for reforming Germany’s so-called “debt brake,” but party leaders have indicated they need time to review the details before committing.
If approved, Merz aims to pass the changes before new lawmakers take office. This is critical because the recent election saw far-right and far-left parties secure a blocking minority, meaning future fiscal reforms could face significant resistance.
Investor Confidence in Germany’s Debt Strategy
Despite the sharp increase in German bond yields, investors are not concerned about Berlin’s ability to manage its debt. Germany’s debt-to-GDP ratio stands at around 63%, significantly lower than in other major Western economies like France, the UK, and the U.S.
Unlike recent bond market turmoil in countries such as the UK, where rising borrowing costs have raised concerns about fiscal sustainability, Germany’s situation is different. Investors see this shift as a pro-growth move rather than a debt crisis, leading to increased demand for riskier assets like stocks at the expense of traditionally safe government bonds.
Karen Ward, a strategist at JPMorgan Asset Management, summed it up: “Yields are rising because of the perception that Germany is turning on the growth tap. It is very risk-positive.”
Wider Market Impact
The bond market reaction wasn’t limited to Germany. Yields on government bonds across the eurozone also rose sharply, as investors reassessed growth prospects for the region.
European markets followed Germany’s lead, with the Stoxx Europe 600 index gaining 1%. Asian stock markets also rebounded after U.S. Commerce Secretary Howard Lutnick hinted that Washington might ease newly imposed tariffs on Mexico and Canada.
Meanwhile, U.S. stocks remained steady at Wednesday’s open, while the dollar fell 0.9% against a basket of major currencies, including the euro and British pound.
A Turning Point for Germany’s Economy?
Germany has long been known for its fiscal conservatism, prioritizing balanced budgets over aggressive economic stimulus. However, the urgency of the current economic downturn, combined with increasing geopolitical tensions, appears to have forced a policy shift.
If this new spending approach succeeds, it could mark the beginning of a more flexible economic strategy in Germany—one that prioritizes growth over strict budget discipline. However, if inflation spikes or borrowing costs spiral out of control, critics may argue that Germany has abandoned its financial prudence too quickly.
For now, though, investors and analysts see this as a positive step. If implemented effectively, this policy change could reshape not only Germany’s economic trajectory but also influence fiscal debates across the European Union.
Source: Financial Times
