The German parliament has passed a historic spending bill that will enable the government to fund hundreds of millions of euros on defense and infrastructure.
This passage marks a long-standing major shift in a country that has long been restricted due to restrictions under the so-called “debt brakes” proposed in 2009.
Although investors remain optimistic about the landmark spending package, the reform has a greater impact on German stocks and government bonds.
The spending bill, advocated by Germany’s conservative CDU/CSU leader and the to-be-hook Friedrich Merz, will allow defense spending to exceed 1% of GDP, totaling about 45 billion euros, with no cap.
In addition, the plan includes a special fund for infrastructure investment in the next twelve years, allocated 300 billion euros to the federal government, allocated 100 million euros to the state government, and 100 million euros to the climate transition fund. The bill will also increase the state’s borrowing limit from 0% of GDP to 0.35%.
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The federal government of the House of Commons passed the bill with 513 votes in favor and 207 votes, comfortably surpassing the two-thirds majority required to amend the constitution. However, the legislation still needs to be approved in a vote scheduled for Friday’s Bundesliga bill representing Germany’s 16 federal state governments. Merz faces the urgency to ensure a change in the law before setting up a new parliament next week as the opposition can try to overturn the decision.
Germany’s benchmark DAX index extended its three-day winning streak, up 0.98% on Tuesday and briefly reached a record-high. Cyclic stocks, including Rheinmetallurgical, Bayer, Mainland and Thyssenkrupp, soared 4% to 10% before retreating.
“In the right way, investment in infrastructure should at least lead to a cyclical rise,” ING macro head Carsten Brzeski wrote in a report Tuesday.
“Back with the impact of positive sentiment, the chances of a cyclical rebound in the German economy have obviously increased.”
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However, he also warned that expenditure plans “have no help in improving the competitiveness of the economy” due to ongoing structural challenges.
