Germany’s borrowing costs surged on Wednesday, marking its largest increase in the last 17 years, as investors backed a new deal to fund defense and infrastructure investments.
Yields on German government 10-year bonds, known as Bunds, surged 0.21 percentage points to 2.69 percent, its biggest one-day move since 2008. Thirty-year Bunds also rose to 3.07 percent, the biggest increase since October 1998.
Incoming Christian Democratic Union (CDU) Chancellor Friedrich Merz and the Social Democrats (SPD) agreed to exempt defense spending above 1 percent of GDP from Germany’s strict constitutional borrowing limit, late on Tuesday.
They decided to establish a 500-billion-euro ($538 billion) debt-financed fund for infrastructure investment and loosen the so-called debt brake.
Introduced in 2009 by Chancellor Angela Merkel’s government, the debt brake was meant to show Berlin’s commitment to balancing the books after the 2008 financial crash. It limits the federal government’s annual borrowing to 0.35 percent of GDP.
The move to create an infrastructure fund and overhaul borrowing rules marks a major break from Merkel-era fiscal rectitude in Europe’s largest economy.
The measures could increase Germany’s debt level to around 3.6 trillion euros ($3.9 trillion) or around 72 percent of gross domestic product by 2029, Scope analyst Eiko Sievert said.
This would be significantly higher than the 63 percent ratio reached at the end of 2024, but still below the previous high of 80 percent seen in 2010 following the global financial crisis.
Sievert said Germany could retain its top credit score despite a spending surge.
“Back then, Germany was able to maintain its AAA rating,” Sievert said. “Whether this remains possible in the coming years depends also on the implementation of necessary political reforms to strengthen competitiveness and economic growth.”
The analyst warned that such special funds were not a substitute for the political reforms required to tackle structural problems, such as rising energy prices and excessive bureaucracy.
S&P Global analyst Frank Gill agreed that the spending plan would be a positive for its Triple-A sovereign credit rating.
He said that Germany’s low debt levels meant it had significant room for additional spending. “We think the Triple-A rating is safe,” he added.
It is a different situation in France, which already has one of the largest budget deficits in the European Union, and is under increasing pressure to rein in overall spending.
Paris approved its 2025 budget last month after weeks of delay in a deeply divided parliament and a change in prime minister.
President Emmanuel Macron told Le Figaro newspaper this week that European countries needed to push defense spending to about 3 to 3.5 percent, substantially higher than the current 2 percent target for NATO members.
France is already increasing its military spending by 3 billion euros ($3.15 billion) annually until 2030 under a long-term defense planning law. Armed Forces Minister Sebastien Lecornu has stated that this law needs to be revised to reflect new geopolitical realities.
Finance Minister Eric Lombard said on Tuesday that welfare spending would not be sacrificed to pay the bill, nor would corporation taxes be raised.
