The EU member states agreed on a statement to boost the bloc’s defence spending, backing Germany’s push to relax its fiscal rules. The DAX hit a new high and Germany’s government bond yields soared.
The German stock market continued to reach a new high on Thursday after the European Union member states unanimously agreed to ease the fiscal rules for defence spending following Germany’s push for a policy reform.
Member states agree to enhance defence spending
The 27 member states agreed on a general statement to bolster the bloc’s defence spending, aligning with the European Commission (EC) President von der Leyen’s proposal to activate a mechanism to mobilise €800 billion in special funds.
The statement noted that it would advance the European Commission’s proposal for additional funding sources for defence and extend €150 billion in special loans. It also called for additional funding sources, which may refer to a commitment to spend 3% or more of the Gross Domestic Product (GDP) on defence, without triggering debt and deficit limits set by the commission.
This clause will particularly back recent Germany’s push to relax its fiscal policy, or the “debt brake,” to increase defence spending and investment in the wider economy.
Germany grappled with fiscal constraints over the past decade maintaining strict spending discipline following Europe’s sovereign debt crisis in 2009. Earlier this week, Chancellor-in-waiting Friedrich Merz announced plans to increase defence spending beyond 1% of GDP, arguing that such spending should be exempt from the debt brake. He stated that Germany must do “whatever it takes” to strengthen its national defence. His conservative party (CDU/CSU) and the SPD, currently in coalition talks, have also proposed a €500 billion special fund for infrastructure investment.
Meanwhile, the EU ignored Hungarian Prime Minister Viktor Orbán’s veto on aid to Ukraine, issuing a separate statement that reaffirmed the bloc’s commitment to supporting Ukraine. The statement declared: “The European Union remains committed, in coordination with like-minded partners and allies, to providing enhanced political, financial, economic, humanitarian, military and diplomatic support to Ukraine and its people, and to stepping up pressure on Russia, including through further sanctions and by strengthening the enforcement of existing measures, in order to weaken its ability to continue waging its war of aggression.”
The DAX hits a new high as German borrow costs soar
The DAX rose 1.47% to a new record of 23,419.48 amid optimism about Germany’s economic recovery. The benchmark index rose more than 17% this year, outperforming global peers, as the defence stocks skyrocketed on expectations of growing military spending.
Wednesday’s rally was particularly driven by the industrial and auto sectors as investors anticipated looser fiscal rules. Additionally, US President Donald Trump’s decision to delay auto tariffs on Mexico and Canada provided a boost to German car manufacturers.
The euro steadied against the US dollar at a four-month high of near 1.08 on Thursday, easing a three-day surging streak. The yield on Germany’s 10-year government bond, known as borrowing cost, jumped to 2.88%, the highest since October 2023. The benchmark bond yield surged 30 basis points in the previous trading day, making the biggest daily increase since the fall of the Berlin Wall in 1990.
The sharp rise in Germany’s government bond yields signals that investors demand a risk premium amid the possible historic fiscal reform. Meanwhile, the European Central Bank (ECB) may slow the pace of interest rate cuts, as increased military spending and Trump’s trade policies contribute to heightened inflationary uncertainty.
