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(Bloomberg) — Germany called for the European Union to reform its fiscal rules to allow countries to make bigger defense expenditures, a massive shift for a country known for its spending restraint.
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A German envoy to the EU shocked his colleagues in Brussels on Wednesday by urging the bloc to allow additional budget room for member states to boost defense-related outlays in the longer term given the geopolitical circumstances, according to people familiar with the matter.
EU leaders are expected to discuss possible changes to the EU fiscal rules when they meet Thursday. A spokesperson for the German government in Brussels declined to comment.
The EU and its member states are rushing to mobilize trillions of euros in additional defense funds to counter the threat of Russian aggression and to compensate for President Donald Trump’s dramatic pullback from America’s commitment to European security.
European government bonds extended their fall after the report as investors braced for additional issuance. The yield on 10-year Italian and French debt both hit session highs and were up around 20 basis points each on Wednesday. The bulk of that move followed Germany’s fiscal announcements late Tuesday, which sent yields and the euro soaring.
Germany’s chancellor-in-waiting Friedrich Merz announced Tuesday that the government would amend the constitution to exempt defense and security outlays from limits on fiscal spending and do “whatever it takes” to defend the country.
He said that with the backing of his likely coalition partners he is also planning a €500 billion ($528 billion) infrastructure fund to invest in priorities such as transportation, energy grids and housing over 10 years.
Berlin’s shifts throw down a challenge to the EU’s other 26 members before they gather on Thursday to discuss how to ramp up military spending across the bloc. With Berlin typically a powerful voice against increased outlays, it’s a game-changer for European defense.
Thursday’s EU summit is expected to endorse the activation of a mechanism that would allow for additional defense spending over the next four years. The EU separately announced a plan Tuesday that could mobilize as much as €800 billion in additional national spending, including €150 billion of EU loans to member states for defense investment.
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