Germany is expected to pass a major spending bill on defence and infrastructure, allowing the country to unleash hundreds of billions of euros into the economy. Both the euro and Germany’s stock markets may maintain their uptrends amid optimism about the fiscal reform.
ADVERTISEMENTThe German stock market and the euro continued to rise ahead of Tuesday’s parliamentary vote on a major spending bill.
The proposal, initiated by Germany’s Chancellor-in-waiting Friedrich Merz, will allow Germany to spend beyond 1% of Gross Domestic Product (GDP), or roughly €45 billion, for defence. The bill’s passage will also enable the government to create a special fund of up to €500 billion for infrastructure investment.
Last Friday, Merz reached an agreement with the Green party on the debt-funded spending package, clearing a key hurdle of the final parliamentary votes. The three parties, including Merz-led CDU/CSU, the SPD, and the Greens, hold 520 seats in the Bundestag lower house, more than enough to make the two-thirds majority to amend the constitutional law.
The DAX rose 0.73% to 23, 154.57 on Monday, just 1% below its all-time high of 23,419.48 on 6 March. The euro rose 0.43% against the US dollar to 1.0922, holding a near four-month high after reaching 1.0947 last week, despite a slight pullback during Tuesday’s Asian session.
European defence stocks skyrocket
Defence stocks surged since mid-February after US President Donald Trump launched peace talks with Russian President Vladimir Putin, initially excluding the European Union and Ukraine. The US president’s decision to halt all military aid to Ukraine has increased the urgency for the European Union to boost defence spending.
In early March, the European Commission leader Ursula von der Leyen proposed a total of €800 billion in special funds for the bloc’s defence budget, urging member states to raise their military spending by an average of 1.5% of GDP.
Following this proposal, Merz unexpectedly announced plans to exempt defence spending from Germany’s debt brake. The 27 member states subsequently endorsed Merz’s plan and reached an agreement to bolster the bloc’s defence spending at a summit in Brussels on 6 March.
European major defence and aerospace stocks, including Rheinmetall, BAE Systems, and Rolls Royce Holdings, all skyrocketed over the past month. These major manufacturers of ammunition and air defence systems are expected to secure substantial contracts from EU member states, particularly Germany.
Shares in the German arms manufacturer Rheinmetall have surged 52% month-over-month and 123% year-to-date, repeatedly hitting new highs. BAE Systems and Rolls-Royce Holdings have also seen gains of 42% and 36% this year, respectively.
The Euro Stoxx Aerospace & Defence Index has risen 33% year-to-date, outpacing the 8% rally in the pan-European Stoxx 600. Meanwhile, Germany’s benchmark DAX has climbed 16% this year, outperforming most global indices.
The euro may continue to rise against the dollar
The common currency has strengthened by 7% against the US dollar since its low in January amid optimism surrounding the surge in European defence spending. The Germany-led fiscal reform is expected to inject hundreds of billions of euros into defence and infrastructure, potentially revitalising what was once Europe’s strongest economy.
Conversely, the US dollar has weakened significantly against other G10 currencies amid an escalating global trade war. Analysts anticipate further declines due to growing economic uncertainties in the United States. “I still view any USD rallies as selling opportunities and would be fading any USD upside across the G10 board,” Michael Brown, a senior research strategist at Pepperstone London, wrote in a note. The Federal Reserve’s rate decision on Wednesday will be a crucial event for the currency market.
Any dovish shift by the central bank could place additional pressure on the dollar, potentially pushing the euro even higher.