“A realisation in Europe on the need to spend more on defence and infrastructure has created a positive sentiment, leading to the recent upside in the markets.”
- Germany’s plan is estimated to provide up to €1tn in additional borrowing over the next decade, which is more than a fifth of German GDP.
- The euro has surged against the dollar, breaking a downward trend that started with the US election in November.
- German stocks have been outperforming US ones, especially mid-caps which are sensitive to domestic conditions.
Europe – and Germany – are taking steps to increase their defence autonomy. On 4 March, the European Commission proposed a four-year fiscal rule exemption for defence spending, endorsed by EU leaders, with Germany calling for a longer-lasting change. This led to a sell-off in European bonds, with the largest increase in Bund yields since German reunification, on concerns over a large increase in supply of bonds. Equities were boosted by a potential push to economic growth. In particular, Germany announced the intention to borrow €900bn to be spent on two funds covering the defence and infrastructure sectors. This is a massive shift for Germany, as the country has traditionally been conservative when it comes to fiscal spending.
You can now read the full whitepaper at the link below
