Germany’s new budget

Germany just redrew the map for European fixed income. Germany’s 2026 federal budget allocates roughly €83 billion to the regular defense budget, plus another €25.5 billion from the off-budget Bundeswehr special fund, pushing total military-related spending north of €108 billion. That’s nearly double France’s defense budget and puts Germany on a glide path toward €200 billion in defense and security spending by 2030, close to a third of the entire federal budget. None of this would be possible under the old rules. In March 2025, Chancellor Friedrich Merz pushed through a historic reform of Germany’s constitutional “debt brake,” exempting defense spending above 1% of GDP from borrowing limits and unlocking a €500 billion infrastructure fund on top of it. A country that spent two decades prizing balanced budgets is now borrowing over €170 billion in a single year. Germans that grew up hearing stories about the Weimar Republic hyperinflation era, are watching this news with the natural worry they’re witnessing a sequel. And Bond markets have noticed too. The 10-year Bund yield jumped roughly 30 basis points in a single session back in March 2025, the sharpest one-day move since German reunification, and has continued grinding higher since, recently pushing up near 3.34%, its highest level in years. The long end has moved even more: the 30-year to 2-year yield spread has roughly doubled, as investors price in a steady wave of long-dated issuance to fund the buildup. This has implications for Europe, not only for Germany: Bunds are the pricing anchor. Research shows German yield moves now explain the vast majority of weekly yield changes across the bloc, around 95% in the Netherlands and Belgium, over 90% in France, roughly 75% in Italy. When the anchor moves, everything tied to it moves too. Secondly, the core-periphery trade is being rewritten. Rising “risk-free” Bund yields have actually helped compress peripheral spreads, as investors rotate toward higher-yielding paper now that safe German debt looks less scarce and more like ordinary sovereign risk. The bottom line is, fiscal dominance is back on the table. With Germany no longer the reflexive safe haven it was for over a decade, “flight to quality” dynamics across the Eurozone may look different in the next downturn than they did in 2011 or 2020. The bigger story here isn’t just a bigger military budget. It’s the end of German fiscal orthodoxy, and a structural repricing of the risk-free rate that anchors an entire currency bloc.

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