Germany will set up €500 billion special defense fund

German defense stocks have been some of the best-performing stocks in the world this year and we found out why today as German chancellor in waiting Friedrich Merz announced a €500 billion special defense fund.

He also said that the debt brake will be reformed for defense with spending above 1% exempted.

Bund yields are up 2.7 bps to 2.50% from a low today of 2.43%.

€500 billion is no small number, it’s 12% of German GDP.

Update: A separate report said this fund is also for infrastructure, which makes sense as that would be a gigantic jump in military spending.

Here is how Goldman Sachs characterizes it:

BOTTOM LINE: Today the Bundesbank published a proposal for a debt brake reform. The proposal is aimed at prioritizing investment spending in the debt brake framework by privileging it within a tiered deficit rule. With a debt-to-GDP ratio above 60%, the proposal allows a structural deficit of 0.9% of GDP exclusively for incremental investment spending above a baseline investment ratio, for example the ratio in 2024. Below 60% debt-to-GDP, the allowed structural deficit increases to 1.4% of which 0.5pp would be unconstrained and 0.9pp would be reserved for incremental investment spending. Overall the Bundesbank estimates an increase in fiscal space of EUR 99bn (2.3% of 2024 GDP, or 0.4% per year) until 2030 if the debt-to-GDP ratio remains above 60% and of EUR 222bn (5.2% of 2024 GDP, or 0.9% per year) if it declines below 60%, most of which in the period 2028 to 2030.

This article was written by Adam Button at www.forexlive.com.