European stock markets rebounded on Wednesday as optimism grew that Germany’s government would loosen its strict fiscal rules and that the United States could soften newly imposed tariffs on Canada and Mexico.
The Stoxx 600 index closed 1% higher, recovering from Tuesday’s global downturn, while the DAX index in Frankfurt surged 3.5%. Leading German gainers included construction firm Hochtief (+15.5%), logistics company Kion Group (+20%), Deutsche Bank (+12.4%), and Siemens Energy (+8.6%).
Defense stocks also continued their rally, with the Stoxx Aerospace and Defense index rising 2.7%, as investors welcomed plans to boost military spending.
Germany set to ease debt brake for €500bn spending plan
Germany’s constitutional debt brake, which limits government borrowing, is set to be reformed after the country’s conservative alliance and the Social Democrats—expected to form the next coalition government—agreed to overhaul the rule.
Incoming Chancellor Friedrich Merz confirmed on Friday that the Green Party had agreed to support the plan, giving lawmakers the two-thirds majority needed to amend the constitution. A final vote is scheduled in the Bundestag on Tuesday, with a secondary vote in the Bundesrat on Friday.
“It is a clear message to our partners… but also to the enemies of our freedom: we are capable of defending ourselves,” Merz said. “Germany is back.”
The proposed reforms include:
- A €500 billion ($529 billion) special infrastructure fund to be spent over ten years.
- Exempting military spending above 1% of GDP from borrowing limits.
- Allocating €100 billion from the infrastructure fund toward climate and economic transformation projects.
Germany’s 10-year bond yield jumped 24 basis points to 2.723%, while the 2-year yield climbed 15 basis points, reflecting expectations of higher borrowing. The euro rose 0.84% against the U.S. dollar, reaching a four-month high before slightly retreating.
Debt brake reform: A turning point for Germany
Germany’s debt brake, introduced in 2009 following the global financial crisis, limits new borrowing to 0.35% of GDP annually. Critics argue that it has stifled investment in infrastructure, defense, and climate initiatives.
Under the new plan, all 16 federal states will also be allowed to take on a limited amount of debt, though some may struggle to pass the necessary constitutional changes at the state level.
Merz defended the shift, saying that U.S. trade policy under President Donald Trump and a more aggressive Russia had changed Germany’s security landscape. “In view of the threats to our freedom and peace on our continent, the rule for our defense now has to be ‘whatever it takes,'” he said.
Markets react as Germany prepares for fiscal expansion
Investors responded positively to the proposed spending plan, betting that a major increase in public investment would stimulate the broader European economy.
Germany’s benchmark DAX index rose nearly 2%, with mid- and small-cap indexes climbing over 3% each. The euro has now gained 5% this month, reflecting renewed confidence in the region’s economic outlook.
However, concerns remain over Germany’s rising debt burden. Economists estimate that national debt could increase from 62% to 90% of GDP over the next decade, adding €250 billion to €400 billion in interest costs.
“With today’s plan, the debt brake might not be entirely dead, but rather buried alive,” said Carsten Brzeski, global head of macro at ING.
What’s next?
The German Bundestag will vote on the debt brake reform next week, with analysts watching whether it clears legal challenges from the far-left and far-right opposition.
If passed, Germany will embark on its largest borrowing expansion in modern history, committing to nearly €1 trillion in new spending over the next decade.
