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By The Wall Street Journal

Germany has announced plans for large-scale spending on defense and infrastructure, marking a major shift from its traditionally tight fiscal policy. This move is expected to stimulate the economy and positively impact the European defense industry. The news sent German stock markets soaring. The DAX index rose 3.4%, while the MDAX index, which focuses on mid-sized companies, surged more than 6%, marking its biggest single-day gain in years. Infrastructure and construction-related firms saw notable gains, with Heidelberg Materials and Bilfinger climbing 18%, while Kion, a forklift manufacturer, surged 20%. Defense and aerospace stocks also saw significant gains. Rheinmetall, Germany’s leading defense contractor, jumped 7.2%, while Airbus, the French aircraft manufacturer, rose 2.4%. Expectations of increased European defense budgets further fueled a rally in the sector. The banking sector also surged, with Deutsche Bank and Commerzbank both gaining over 10%, reflecting the market’s positive sentiment.

In the foreign exchange market, the euro strengthened by over 1%, approaching $1.10 against the U.S. dollar.

However, the bond market reacted sharply. As the German government prepares to issue more bonds to fund its increased spending, bond prices fell and yields spiked. The 10-year German bond yield rose to 2.8%, marking the biggest single-day increase since 1990.

The announcement is also politically significant. Friedrich Merz, the frontrunner for Germany’s next chancellor following last month’s election, called the decision a "historic turning point" for the country. He emphasized that with Europe’s freedom and peace under threat, Germany must take necessary action.

Merz and his coalition government plan to create a $530 billion (approximately €500 billion) infrastructure fund and exempt defense spending exceeding 1% of GDP from Germany’s constitutional debt limit rules. The proposal will be officially debated in the German Parliament next week.

Deutsche Bank described the policy as "one of the most significant shifts in Germany’s post-war economic history." The bank also raised its euro exchange rate target and signaled a potential upward revision of Germany’s economic growth forecast.

Germany’s massive fiscal spending is expected to boost economic growth, with defense and infrastructure sectors among the biggest beneficiaries. However, the stronger euro and rising German bond yields are likely to have far-reaching effects on European financial markets in the coming months.