European stocks, euro rally as Germany strikes historic debt deal #NewsGerman

Germany’s conservative leader Friedrich Merz, set to become the next chancellor, sealed a landmark deal on Friday with the Greens and Social Democrats to ease Germany’s strict borrowing limits, unlocking an unprecedented €500-billion spending spree that could redefine the country’s economic future.

Markets have responded swiftly, sending the euro higher and German equities surging as investors bet on an economic boost from increased defence and infrastructure spending.

The new agreement will exempt defence spending beyond 1% of GDP from Germany’s strict constitutional debt brake and create a €500bn fund for infrastructure investment. It also includes €100bn earmarked for climate and economic transformation projects.

“Germany is back,” said Merz, announcing the deal.

“It is a clear message to our partners and friends, but also to our opponents, to the enemies of our freedom: we are capable of defending ourselves and we are now fully prepared to defend ourselves,” he added.

Merz expects the necessary constitutional amendments to be voted on as early as Tuesday. With a two-thirds majority needed to approve the changes, negotiations with the Greens proved crucial in securing support.

Markets have embraced the shift in Germany’s fiscal stance. The euro climbed 0.3% to 1.0890, heading for a second straight week of gains, while the yield on Germany’s 10-year Bund rose six basis points to 2.90%.

The DAX index jumped 1.5%, with defence and industrial stocks leading gains.

Rheinmetall soared 8.76%, HeidelbergCement gained 5.19%, and Siemens Energy rose 3.18%. Financials also rallied, with Commerzbank up 3.54%.

Broader European markets followed suit, with the Euro STOXX 50 rising 1%, Italy’s FTSE MIB up 1.8%, and France’s CAC 40 climbing 1.2%.

The banking sector was another standout performer, with Erste Bank up 4.88%, Deutsche Bank gaining 3.59%, and BNP Paribas rising 3.47%.

Related

“Markets are clearly viewing the change in Germany’s fiscal stance as comparable to the decision to jointly issue debt in response to the pandemic,” said Bank of America analyst Adarsh Sinha.

Goldman Sachs has significantly revised its German growth forecasts, now predicting GDP will rise by 0.2 percentage points to 0.2% in 2025, by 0.5 points to 1.5% in 2026, and by 0.6 points to 2% in 2027. The investment bank also sees a broader spillover effect across Europe, lifting eurozone GDP growth projections to 0.8% in 2025, 1.3% in 2026, and 1.6% in 2027.