German lending costs soar after Merz deal to increase military and infrastructure spending

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German lending fees will relax the country’s strict “debt brake” rules to fund investments in military and infrastructure after Friedrich Merz, who is listed in Friedrich Merz, reached a historic agreement with his possible alliance partners.

Bund yields surged 0.19 percentage points to 2.67% in 10 years, the largest one-day relocation since 2020 as investors provide additional borrowing from the government and boost growth in Germany.

Meles said late Tuesday that his party and rival Social Democrats (SPD) will jointly introduce a bill next week to relax the country’s strict lending rules.

Deutsche Bank economists described the deal as “one of the most historic paradigm shifts in German post-war history” and added that “the speed at which this happened and the extent of forward-looking fiscal expansion are reminiscent of German unity.”

Germany’s largest bank said it is likely to increase its forecast for the country’s GDP “once it becomes clearer in the coming days”, adding: “Now, there is a meaningful risk of upside potential for our 1.0% growth forecast for 2026”.

The agreement reached by Merz and his possible alliance partner SPD would exempt the Ministry of Defense from spending more than 1% of GDP, set up a balanced tool of 50 billion euros for debt-funded infrastructure investments from Germany’s strict constitutional lending limits, and provide debt rules for states.

The euro rose 0.8% against the dollar to $1.071, the highest since November, with German stocks soaring and investors betting on growth.

Merz plans to push changes in Parliament this month through the majority of Parliament. The far-right and left-wing parties won obstacles from minorities in the February 23 election and could prevent any constitutional changes in the next legislative period.

The deal between the Merz CDU/CSU party group and the SPD still requires Green Party support to gain a two-thirds majority in order to change the constitution. The Greens have long called for debt-braking reforms, but senior party data says they need to digest the details of the plan first before reviewing it. Analysts expect the party to finally acquiesce.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said fiscal plans will quickly boost economic sentiment and growth because “companies and citizens will feel that they are finally doing something.”

For two consecutive years in Germany’s GDP, economists have previously predicted the economy will stagnate or decline in 2025 as it struggles to cope with high energy costs, weak corporate investment and weak consumer demand.

“Financial ocean changes will permanently change the way forex trading,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price.

Investors view Germany’s debt as a benchmark risk-free asset for the entire euro zone, but its bonds have historically been in short supply due to their reluctance to borrow.

France’s 10-year government bond yields were higher, with yields rising 0.12 percentage points to 3.35%.

Germany’s DAX index soared 2.7% after the U.S. imposed tariffs on some trading partners.

German infrastructure companies were the biggest gain, with Heidelberg’s materials rising 11%, while Billinger’s growth was 17%. Thyssenkrupp, Germany’s largest steel maker, rose 15%.

Europe’s defense sector expanded a bubble rally. Rheinmetall, Germany’s largest defense company, rose 6.2%, while Thales, which is listed in Paris, rose 6.8%.

Earnings spread to other European markets, with Stoxx across the continent rising 600% 1.1%.

Asian stocks rebounded earlier after comments from U.S. Commerce Secretary Howard Lutnick hinted that tariffs could lower U.S. neighbors.

Futures contracts tracking the U.S. S&P 500 index rose 0.6%. The dollar fell 0.4% against six currencies, including the euro and the pound.

Lutnick’s comments were posted on U.S. President Donald Trump attacked Canadian and Mexico imports with 25% tariffs on Tuesday and imposed 10% tariffs on Chinese imports in the 10% tax imposed last month.

In his first major policy speech to Congress, Trump said the tariffs would cause “some interference.”