Germany has taken a decisive step towards increasing government spending, which has shocked financial markets and led to a rise in the euro and the cost of government borrowing.
On Wednesday, the euro surged by 0.7% against the dollar, reaching 1.0722, the highest level since November. This increase was triggered by news that Friedrich Merz, the future Chancellor of Germany, reached an agreement with the Social Democrats to bypass the constitutional limit on budget deficits.
The prospect of large-scale spending, amounting to hundreds of billions of euros on defense and infrastructure, led to a 0.25% rise in the cost of Germany’s 10-year bonds, marking the biggest increase in the past 17 months. This policy change, related to the increase in fiscal spending, is expected to be approved by parliament at the end of the month.
The new fiscal strategy, which includes a 500 billion euro fund for infrastructure, represents a significant shift from the traditional budgetary discipline that dominated Germany’s post-war economy. Economists believe these changes could have positive economic effects on the country, although they warn that global trade dynamics and potential US tariffs could complicate the euro’s growth.
Furthermore, borrowing costs in the eurozone have also increased, which could lead to higher interest rates and inflation. Economists note that the reform could result in an uncontrollable level of debt, with Germany’s debt potentially rising to 100% of GDP by 2034.
