Germany’s lower house of parliament is set to vote on Tuesday on a proposed massive increase in state borrowing in order to fund a surge in defence spending, which could boost Europe’s largest economy and stimulate growth across the region.
A two-thirds majority is required to pass the legislation to change the constitutionally enshrined borrowing rules to allow higher spending on security, as well as creating a 500 billion euro fund for infrastructure.
Should the legislation pass the Bundestag lower house of parliament, it still has to go to the Bundesrat upper house, which represents the governments of the 16 states that make up Germany.
Friedrich Merz, the likely incoming German Chancellor, has his conservatives are tipped to back the changes, along with their possible coalition partners, the center-left Social Democrats. Talks to overhaul the longstanding "debt brake" in Germany were also held last week to gain the support the Greens party.
Following the negotiations, analysts at Deutsche Bank said the majority of "execution risk" around the vote has been averted.
"Still, as expected, there continues to be political noise and minor sources of uncertainty, ranging from the possibility of individual MPs dissenting in today’s vote to a potential lack of a two-thirds majority in the upper house vote on Friday," the analysts wrote in a note to clients.
Optimism about Germany’s fiscal reset plan has seen money pour into Europe, with the DAX leading the way, gaining more than 16% year to date.
On Tuesday, the DAX had added 1.2% while the pan-European had risen by 0.7%. Shares in German firms like BMW (ETR:BMWG), Continental (ETR:CONG) and Infineon (ETR:IFXGn) were trading near the top of the DAX, and Delivery Hero (ETR:DHER), Thyssenkrupp (ETR:TKAG) and Hensoldt (ETR:HAGG) were among the best performers on the mid-cap MDAX.
Germany’s benchmark 10-year bond yield climbed as traders weighed the impact of higher borrowing and spending on inflationary pressures. Yields typically move inversely to prices.
