‘Germany is back,’ says Merz, as he wins key support for debt deal
Germany’s incoming chancellor Friedrich Merz said he had secured the crucial backing of the Green party for a massive increase in state borrowing and reform of debt rules, clearing the way for the outgoing parliament to approve it next week.
Merz’s conservatives and the Social Democrats, who are in negotiations to form a government after the national election last month, have proposed a €500bn fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth in Europe’s largest economy.
With the support of the Greens, they now have the two-thirds majority necessary to pass constitutional amendments, with a vote scheduled for Tuesday. Merz had justified the need to push the package through the outgoing parliament after recent shifts in US policy under president Donald Trump, warning that a hostile Russia and an unreliable US could leave Europe exposed.
Merz said at a press conference:
It is a clear message to our partners .. but also to the enemies of our freedom: We are capable of defending ourselves.
Germany is back. Germany is making a significant contribution to the defence of freedom and peace in Europe.
News of the deal lifted eurozone government bond yields, shares across Europe and the euro, with hopes that the borrowing plan will be a boost to all of Europe.
Germany’s benchmark Dax stock index rose by almost 2%, while the mid- and small-cap indexes rose more than 3% each. The euro rose by 0.5% against the dollar, taking its gains so far this month to 5%.
The compromise reached with the Greens includes an allocation of €100bn for the climate and economic transformation fund from the €500bn earmarked for infrastructure, Merz said.
It also includes a change to the constitution that would see spending on defence, civil and disaster protection, intelligence services, information security exempt from borrowing limits – the controversial Schuldenbremse or debt brake – if they exceed 1% of economic output.
The reforms will mark a rollback of those strict debt rules, imposed after the 2008 global financial crisis that have since criticised as being outdated and putting Germany into a fiscal straitjacket.
Carsten Brzeski, global head of macro at ING, said:
With today’s plan, the debt brake might not be entirely dead but rather buried alive.
The only limiting fiscal rule for the German government will be the (EU) Stability and Growth Pact. And we know from past experiences that these rules can be soft as butter if needed.
Key events
Harry Chambers, assistant economist at Capital Economics, notes the University of Michigan’s survey doesn’t fully reflect this week’s stock market declines, so could be even weaker when the final estimate is released in two weeks’ time.
The plunge in the University of Michigan Consumer Sentiment Index in March, paired with the surge in inflation expectations, indicates that consumers’ concerns about the impact of the Trump administration’s policies are growing. The decline will fan recession flames further, even if the sentiment indices have been a poor guide to consumption growth in recent years.
While the current conditions index edged down to 63.5, from 65.7, the expectations index plummeted to 54.2, from 64.3, likely reflecting both the recent falls in the stock market and the growing uncertainty around president Trump’s policies.
That said, the survey won’t have fully reflected the falls in stock prices this week, and so the final estimate in a couple of weeks could be even weaker. The further plunge in sentiment poses a downside risk to our consumption forecast, although the survey hasn’t been a reliable indicator of consumption in recent years.
Wall Street rallies but set for fourth week of losses; Michigan consumer sentiment survey weak
On Wall Street, US stocks are also trading higher but pared some gains after the University of Michigan’s consumer sentiment survey was released.
The headline index plunged to 57.9, from 64.7, and now sits at its lowest level since November 2022. The survey also showed long-term inflation expectations rising to 3.9%, the highest level since 1993.
As oil prices have dropped back recently, the increase reflects entirely consumers’ increasing concerns about the impact of tariffs, Capital Economics notes. Indeed, the accompanying commentary noted that sentiment slid across “all groups by age, education, income, wealth, political affiliations, and geographic regions”.
The Dow Jones has gained 261 points, or 0.6%, to 41,074 while the Nasdaq is 1.4% ahead and the S&P 500 has bounced back 1%, following yesterday’s 1.4% slide.
One bit of uncertainty hanging over Wall Street may be clearing after the Senate made moves to prevent a possible partial shutdown of the US government, with a deadline looming at midnight. But the escalating trade war is a persistent worry for investors.
The stock rally won’t be enough to keep Wall Street from a fourth straight losing week, which would be its longest such streak since August.
The University of Michigan sentiment survey is noisy, but to have long-term inflation expectations reaching the highest since 1993 is problematic. pic.twitter.com/4jrAS4kNif
— Lisa Abramowicz (@lisaabramowicz1) March 14, 2025
The University of Michigan has just released updated sentiment data segmented by political affiliation, showing a decline across all groups: pic.twitter.com/6e7I0JwksT
— Michael McDonough (@M_McDonough) March 14, 2025
‘Germany is back,’ says Merz, as he wins key support for debt deal
Germany’s incoming chancellor Friedrich Merz said he had secured the crucial backing of the Green party for a massive increase in state borrowing and reform of debt rules, clearing the way for the outgoing parliament to approve it next week.
Merz’s conservatives and the Social Democrats, who are in negotiations to form a government after the national election last month, have proposed a €500bn fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth in Europe’s largest economy.
With the support of the Greens, they now have the two-thirds majority necessary to pass constitutional amendments, with a vote scheduled for Tuesday. Merz had justified the need to push the package through the outgoing parliament after recent shifts in US policy under president Donald Trump, warning that a hostile Russia and an unreliable US could leave Europe exposed.
Merz said at a press conference:
It is a clear message to our partners .. but also to the enemies of our freedom: We are capable of defending ourselves.
Germany is back. Germany is making a significant contribution to the defence of freedom and peace in Europe.
News of the deal lifted eurozone government bond yields, shares across Europe and the euro, with hopes that the borrowing plan will be a boost to all of Europe.
Germany’s benchmark Dax stock index rose by almost 2%, while the mid- and small-cap indexes rose more than 3% each. The euro rose by 0.5% against the dollar, taking its gains so far this month to 5%.
The compromise reached with the Greens includes an allocation of €100bn for the climate and economic transformation fund from the €500bn earmarked for infrastructure, Merz said.
It also includes a change to the constitution that would see spending on defence, civil and disaster protection, intelligence services, information security exempt from borrowing limits – the controversial Schuldenbremse or debt brake – if they exceed 1% of economic output.
The reforms will mark a rollback of those strict debt rules, imposed after the 2008 global financial crisis that have since criticised as being outdated and putting Germany into a fiscal straitjacket.
Carsten Brzeski, global head of macro at ING, said:
With today’s plan, the debt brake might not be entirely dead but rather buried alive.
The only limiting fiscal rule for the German government will be the (EU) Stability and Growth Pact. And we know from past experiences that these rules can be soft as butter if needed.
US turns to Denmark as it hunts for eggs despite Trump’s threat over Greenland
In the latest twist, the United States has asked Denmark and other European nations if they can export eggs as Americans face surging egg prices, the Nordic country’s egg association said on Friday.
The request from the US Department of Agriculture coincides with a raft of new US tariffs on countries, including in Europe, and the threat of more.
There has been a shortage of eggs in the US for some time, driving up prices sharply, following an outbreak of bird flu and other factors.
Donald Trump promised to lower egg prices on his first day in office, but prices increased 59% on a year-on-year basis in February, the first full month of his administration.
Trump has also threatened economic sanctions unless Denmark hands over control of Greenland to the US, and said this week that he thought the US would eventually annex it – despite its status as an autonomous territory of Denmark, a member of the European Union.
A letter reviewed by Reuters showed that a representative of US Department of Agriculture in Europe had sent formal inquiries to egg-producing countries in late February seeking information on their ability and willingness to export eggs to the American market.
‘We’re ground zero’: Canada steel town is frontline of Trump’s tariff trade war
The sprawling ArcelorMittal Dofasco steel plant in Hamilton, Ontario has in recent months become a site of pilgrimage for Canadian political leaders.
Dressed in pristine orange coveralls and hard hats, prime ministers and provincial premiers gaze at coiled sheets of steel with the stern grimaces and keen interest of generals reviewing a military parade.
And, in the eyes of many Canadians, the country is already in a state of conflict.
This week, after a string of feints and retreats, a phony trade war came to an end as Donald Trump threatened to inflict “a financial price … so big that it will be read about in History Books for many years to come”.
And so, barely 48 hours after winning the race to lead the ruling federal Liberal party, Canada’s prime minister-designate, Mark Carney, became the latest politician to head to Dofasco.
The former governor of the Bank of England and the Bank of Canada criticized the “unjustified” tariffs and said he was willing to sit down with Trump, as long as the president showed “respect for Canadian sovereignty”.
That remained in doubt: just a day earlier, Trump had restated his argument that Canada should become the “cherished Fifty First State”, adding: “The artificial line of separation drawn many years ago will finally disappear.”
Such talk might once have been dismissed as harmless trolling or perhaps a strategy to win trade concessions, but Canadians are taking Trump at his word – and readying for a worsening of relations.
Andrea Horwath, the mayor of Hamilton, said:
Nobody wants to be here. Nobody wants a trade war. But here we are and I can say one thing – we’re not going to roll over.
We’ve seen a powerful Team Canada approach across the country because at this moment, fracturing is not an option. Instead, we’re seeing Canada at its finest.
That unity has come in the form of a “buy Canada” movement, boycotts of leisure travel to the United States, cancellation of entertainment subscriptions and a rallying cry of “Elbows Up” – a reference to energetic tackles in ice hockey.
European stocks, euro rally as Merz reaches historic debt deal with Greens
Incoming German chancellor Friedrich Merz has reached an agreement with the Greens today on a massive increase in state borrowing, just days before a parliamentary vote next week, Reuters is reporting, citing a source close to the negotiations.
A debt deal compromise is being examined by finance ministry officials, parliamentary sources said. Merz’s conservatives and the social democrats hammered out the deal but need the support of the Green party to get the proposed reform of debt rules and massive increase in state spending through parliament, as they require a two-thirds majority for necessary constitutional changes.
News of the deal sent euro zone government bond yields, shares and the euro soaring.
The German Dax jumped as much as 1.8% and is now 345 points ahead at 22,922, a near-1.6% rise. The French and Italian markets are 1.1% and 1.3% ahead, respectively, while the UK’s FTSE 100 has climbed by 55 points, or 0.6%, to 8,597.
The euro is 0.4% higher, rising back above $1.09 to $1.0901, and bond yields jumped on the prospect of higher borrowing.
Another source said some details were still being hammered out.
Merz, a former investment banker who flies his own private plane, wants the outgoing German parliament to approve a €500bn fund for infrastructure and sweeping changes to borrowing rules – known as the Schuldenbremse, or debt brake – to kickstart economic growth and ramp up defence spending in Europe’s largest economy.
The politician whose conservatives won a national election last month is racing to secure the funds before a new parliament convenes on 25 March, where they risk being blocked by an expanded contingent of far-right and far-left lawmakers.
German parties reportedly reach fiscal deal, sending stocks, bond yields and euro soaring
Reports just in that Germany’s incoming chancellor Friedrich Merz has reached a deal with the Green party on the proposed borrowing bonanza, to allow higher spending on infrastructure and defence.
This has sent stocks on the Dax soaring by 1.7% to a one-week high, amid hopes for a boost to the economy, while bond yields are also sharply higher on the prospect of rising government borrowing.
The yield, or interest rate, on the benchmark 10-year, jumped as high as 2.93% and are now 5 basis points higher at 2.91%.
The euro reversed earlier losses to trade 0.4% higher against the dollar at $1.0896.
Good Morning from #Germany, where incoming Chancellor Friedrich Merz has reached a deal with the Greens on the country’s €1,000bn debt plan, HB reports. As a result, German 10y yields have jumped to 2.93%. pic.twitter.com/Y9Zi5hDsFd
— Holger Zschaepitz (@Schuldensuehner) March 14, 2025
Gold breaks through $3,000 in safe-haven rush
Spot gold has just broken through $3,000 an ounce, as investors are rushing into safe-haven assets.
Gold has risen by 0.5% to $3,004.86 an ounce, a fresh record high.
Paul Williams, managing director of Solomon Global, a specialist supplier of certified gold and silver bars and coins, said:
Gold breaching the psychologically significant $3,000 level is a direct response to escalating trade tensions and the growing economic uncertainty that this brings.
Trump’s latest tariff threat, a potential 200% duty on EU alcohol imports, has sent further shockwaves through global markets, fuelling demand for safe-haven assets. This isn’t just a knee-jerk reaction to individual policies; it’s investors seeking protection against systemic risk. Given the current momentum, gold at $3,500 by summer and $4,500 within the next year are in the realms of possibility.
With the Trump tariff turmoil spooking markets once again, gold is being chosen as the ultimate shield against political and economic unpredictability.
Tesla tells US government Trump trade war could ‘harm’ EV companies
Even Tesla is getting worried about Donald Trump’s trade policies.
Elon Musk’s Tesla has warned that Donald Trump’s trade war could expose the electric carmaker to retaliatory tariffs that would also affect other automotive manufacturers in the US.
In an unsigned letter to Jamieson Greer, the US trade representative, Tesla said it “supports fair trade” but that the US administration should ensure it did not “inadvertently harm US companies”.
Tesla said in the letter:
As a US manufacturer and exporter, Tesla encourages the Office of the United States Trade Representative (USTR) to consider the downstream impacts of certain proposed actions taken to address unfair trade practices.
The company, led by Musk, a close ally of Trump who is leading efforts to downsize the federal government, said it wanted to avoid a similar impact to previous trade disputes that resulted in increased tariffs on electric vehicles imported into countries targeted by the US.
Global stocks on track for worst week since September despite gains today
European stock markets are pushing higher, while the pound and the euro have weakened slightly against the dollar.
The FTSE 100 index in London has risen by 28 points to 8,570, a 0.3% gain. The German Dax is 0.46% ahead while the French CAC climbed by 0.7% and the Italian FTSE MiB is up by 0.36%.
AJ Bell investment director Russ Mould explained:
The FTSE 100 looked set to end the week on a positive note, supported by sterling weakness after an unexpected drop in UK GDP.
While Wall Street entered official correction territory overnight, Asian stocks shrugged off this weakness as Chinese authorities introduced measures aimed at boosting consumer spending. This helped give the mining sector in London a lift as investors looked for a knock-on impact on metals demand in a commodity-hungry economy.
Gold hit a fresh record high on the latest tariff moves by the US, with threatened punitive levies on alcohol from the EU. Doubts about the Ukraine-Russia peace deal added to the uncertainty.
Despite today’s gains, also in Asia, global stocks are on track for their worst week since September, while gold hit a record high. Investors are concerned about the escalating trade war triggered by Donald Trump’s frequent tariff announcements hitting a wide range of goods from metals to whisky, which have led the EU and Canada to retaliate.
MSCI’s all country world stock index is down by 1.1% today, and is 3.4% so far this week.
Spot gold has risen by 0.4% to $2,999.39 an ounce.
In currency markets, the pound and the euro are both about 0.1% lower against the dollar, at $1.2928 and $1.1912 respectively.
Michael Strobaek, global chief investment officer at Lombard Odier, told Reuters:
I think Trump 2.0 is nothing like Trump 1.0. This time, the president seems prepared to let US markets and the economy suffer while he implements his ‘America first’ goals.
Steven Rattner, an investor and journalist, said:
German inflation dips to 2.6% in February
Inflation in Germany, Europe’s largest economy, dipped to 2.6% last month, lower than previously thought.
The country’s federal statistics office (Destatis) had initially estimated that annual inflation, harmonised to compare with other EU countries, remained at 2.8% for the second month in a row.
It has also revised down the month-on-month change in inflation to 0.5% from 0.6%. Destatis did not give a reason for the revisisions.
The national measure of inflation stayed at 2.3% in February, unrevised. Food and services prices drove up inflation while energy prices had a downward effect on the consumer price index.
Turning to the the 10% plus slide in the S&P 500, a key US stock market index, since its recent peak in January, which is known as a correction.
In a research note entitled “pain,” George Saravelos, global co-head of currency research at Deutsche Bank in London said there could a be bigger shift under way regarding the dollar’s safe-haven status.
Something painful is happening: European investors are currently losing as much money on their S&P 500 holdings as they did during the ~30% inflation-driven sell-off in 2022. Why? Despite the drop in US equities, the dollar has failed to rally. Dollar weakness this year has been additive rather than offsetting to underlying asset losses. It is clear from our conversations with real money investors that the risk-reducing properties of unhedged dollar exposure have played a key part in portfolio allocation over the last decade. When “bad things” happen the dollar tends to rally, so unhedged US risky assets have proven a highly attractive portfolio diversifier. Yet this is now changing.
We argued a few days ago that it is the idiosyncratic downward repricing of US fiscal, growth, and Fed expectations that is causing the dollar to weaken alongside US equities. Broader rhetoric that challenges the international rule of law may also be undermining dollar safe-haven perception. If this correlation breakdown between US equities and the dollar continues, it will open up a more structural discussion among European (and global) asset managers on the diversification benefits of unhedged risky-asset dollar exposure. Some press reports suggest this may already be starting. By extension, a sizeable net reduction of dollar exposure would be on the cards.
We have for a long time not been believers in the concept of a new (say, Mar-A-Lago) currency accord to weaken the dollar. We do believe that policy that undermines the economic soundness of the dollar would achieve the same thing.
Brexit continues to hurt the UK economy.
British food and drink exports to the EU have tumbled by more than a third since Brexit, according to new trade body figures highlighting how bureaucratic barriers have changed the relationship between the UK and its most important trading partner.
Products including whisky, chocolate and cheese remain popular with EU customers but overall food export volumes to the bloc fell to 6.37bn kg in 2024, representing a 34% decline compared with 2019 levels, the Food and Drink Federation (FDF) found.
While some of the fall in exports since the UK left the union in January 2020 can be attributed to global events including the Covid pandemic and the war in Ukraine, the FDF’s latest trade snapshot reveals other European countries including the Netherlands, Germany and Italy have increased their export volumes since 2020. The trade body has blamed post-Brexit trading arrangements for the slump in UK exports.
The total volume of food and drink imports to the UK rose to their highest ever level last year, at a time when British farmers are warning that a “cashflow crisis” and series of pressures including planned tax changes, bad weather and rising costs are squeezing domestic food production.
The EY Item Club forecasting group expects economic growth to be “relatively steady” this year and points out that monthly GDP data can be noisy.
Most of the sectors that enjoyed a strong December saw output drop back in January, with the manufacturing sector being a notable example. This weakness was partially offset by stronger output in the consumer-facing parts of the services sector, with a rise in distribution activity founded on a significant increase in retail sales in January.
Matt Swannell, chief economic advisor to the EY Item Club, said:
Monthly GDP data can be noisy, and it was always likely that there would be some payback in January from December’s strong reading. Today’s softer reading was in line with our expectations. The launchpad from a strong expansion at the end of last year means we expect quarterly GDP growth to be around 0.3% in Q1, a step up on the pace seen in the second half of 2024.
Looking further ahead, we think growth is likely to be relatively steady this year, running at a similar steady pace to Q1. We expect a modest pickup in consumer spending growth, with firming household confidence offsetting the drag from weaker real income growth. However, the lagged passthrough of past interest rate rises, tighter fiscal policy, and rising trade policy uncertainty are likely to prevent a stronger pickup in momentum.
JPMorgan economist Allan Monks said:
We had looked for further growth in January: retail sales rebounded in the month and the impact of government stimulus was expected to continue to support activity. That was evident in this report, with a strong gain from the distribution sector coming alongside a 0.4% increase in health and social output.
At the same time, however, consumer-facing services showed only a soft 0.1% rise, with declines in accommodation, food services and entertainment. Business services such as IT, communications and finance also showed declines. And there was the offset from the weakness on the goods side, which tends to be more influenced by global trends. In January, metals and pharmaceuticals production showed large contractions.
This release leaves weaker growth momentum in place at the start of this year, but first-quarter GDP should still print positively. The level of output in January remains 0.2% above the fourth-quarter average, and we expect the government sector to continue to boost growth during the first quarter. The manufacturing sector and some parts of services may also rebound in February.
We have revised down our forecast for first-quarter GDP from an annualised 1.8% to 1.4%. This implies there is still upside risk around the BoE’s 0.4% annualised forecast for Q1. There is, however, more of a concern about the underlying health of the private sector.
