Debt Brake - Business Outrank

After Germany announced a historic decision to loosen its ‘debt brake’ to increase defence and infrastructure spending, European markets rose. The move, however, saw German borrowing costs soar with 30-year bond yields rising by 16 basis points after an earlier rise of 25 basis points, which was the biggest increase since 1998. The DAX 30 index surged nearly 4 per cent, led by industrial stocks, while London, Paris, and Milan also recorded significant gains. Anticipation of increased military spending has boosted defence stocks, with Rheinmetall up 5 per cent, BAE Systems being up 40 per cent this year, and Italy’s Leonardo up 74 per cent. Merz, Germany’s Chancellor-in-waiting, has revealed that defence spending above 1% of GDP will be exempt from debt rules. The coalition government also revealed a €500bn fund to upgrade national infrastructure over the next decade. In response, Germany’s biggest construction firms almost all posted double-digit gains, including Heidelberg Materials, up 13.5 per cent, and Bilfinger, up 19 per cent. The euro also rose 0.7 per cent against the US dollar, and the pound gained on investor optimism. Further, adding to the market momentum, the US commerce secretary hinted at a potential resolution to Trump’s trade war with Canada and Mexico. This, according to economists, is a game changer for Germany, which has moved from strict fiscal discipline to aggressive investment. Analysts expect the stimulus package to boost German GDP growth to 1.5-2% by 2027. However, German bond yields are rising while German borrowing costs are still considerably lower than those in the US and UK and thus Germany’s finances are still stable despite this fiscal shift.

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