The new CDU/CSU coalition pivot from “Schwartze Null” -Zero Black- to “whatever it takes for our defence” is shaking European debt markets.
Following the CDU/CSU and SPD’s announcement to lift the debt brake for targeted investments, new issuance levels are expected to drive annual deficits from a forecasted 2.5% of GDP to well over 3%, reflecting an aggressive stance toward financing infrastructure and defence spending.
Officials now plan to establish a dedicated €500 billion infrastructure fund over the next decade, or €50 billion per annum. This fund, intended for upgrading transport networks, digital infrastructure, and energy grids, marks a significant departure from the austerity policies that have characterized Germany’s past fiscal strategy, Schwartze null.
In tandem, defence spending – now exempt from the traditional debt ceiling – will further contribute to a surge in borrowing. Analysts estimate that the debt-rule adjustment could add roughly €220 billion in extra borrowing capacity by 2030, compared to prior forecasts.
Holger Schmieding, chief economist at Berenberg said “These proposals for an immediate loosening of Germany’s fiscal rules will likely be enacted. They are a fiscal sea change for Germany.” in reference to Mario Draghi “whatever it takes speech” in 2012.
Markets had already been positioning following defence spending announcement by the European commission, but the main action was in bund. Yields were moving aggressively higher with a jump of more than 20 bips between 4 March2024 and 5 March 2025, a one day increase not seen since 1998.
In an analyst note Soc Gen fixed income team noted: “For an economy, the sick man of Europe, that has not grown in two years, the fiscal uplift is welcome and significant. There will be a multiplier effect from infra and defence spending to the broader domestic economy and the eurozone provided that the bulk of the funds stay in the European region”
On 6 March, while the ECB is widely expected to cut short-term rates by 0.25% the impact of all these fiscal easing caused Citi’s macro team to posit that “the central bank might no longer [be] asserting that monetary policy is restrictive”.
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