How will Germany's debt reform impact its stock and bond market?

Tina Teng

Wed, Mar 19, 2025, 1:27 AM 3 min read

Germany’s parliament has passed a historic spending bill enabling the government to finance hundreds of billions of euros in defence and infrastructure.

The passage marks a major fiscal shift for a country long constrained by spending austerity under the so-called 'debt brake' introduced in 2009.

While investors remain broadly optimistic about the landmark spending package, the reform has wider implications for Germany’s equity markets and government bonds.

The spending bill, championed by Germany’s conservative CDU/CSU leader and Chancellor-in-waiting Friedrich Merz, will allow defence spending to exceed 1% of Gross Domestic Product (GDP), amounting to approximately €45bn, with no upper limit.

Additionally, the plan includes a €500bn special fund for infrastructure investment over the next twelve years, with €300bn allocated to the federal government, €100bn to state governments, and €100bn to the Climate Transition Fund. The bill will also raise the borrowing limit for state governments from 0% to 0.35% of GDP.

• Germany's parliament passes historic package boosting defence spending

• The DAX and euro rise ahead of Germany’s parliamentary vote on a major spending bill

The lower house of parliament, the Bundestag, passed the bill with 513 votes in favour and 207 against, comfortably exceeding the two-thirds majority required to amend the constitution. However, the legislation still requires approval from the Bundesrat, which represents Germany’s 16 federal states, in a vote scheduled for Friday. Merz faces urgency in securing the legal change before a new parliament is formed next week, as opposition parties could seek to overturn the decision.

Germany’s benchmark DAX index extended a three-day winning streak, rising 0.98% on Tuesday and briefly reaching a record high. Cyclical stocks, including Rheinmetall, Bayer, Continental, and ThyssenKrupp, surged between 4% and 10% before pulling back.

“Implemented in the right way, investment in infrastructure should lead to at least a cyclical upswing,” wrote Carsten Brzeski, global head of macro at ING, in a report on Tuesday.

“The chances of a cyclical rebound in the German economy on the back of positive sentiment effects and later actual spending have clearly increased.”

• Germany’s economic sentiment hits 2-year high, EU exports to US soar

• Germany to ease government debt limits to boost economy and defence spending

However, he also cautioned that the spending package would "do very little to improve the economy’s competitiveness" due to persistent structural challenges.