Euro Surges on News of EU Rearmament
The euro continues its rally for the second consecutive day following statements from Germany’s incoming Chancellor Friedrich Merz about allocating billions of euros for defense and infrastructure. This coincided with European Commission President Ursula von der Leyen’s initiative to activate €800 billion in defense funding after the suspension of U.S. military aid to Ukraine.
The euro rose above $1.06, reaching its highest level since November 12, 2024. Over two days, it strengthened by 2 cents, coinciding with record levels in European stock markets. The yield on German 10-year bonds stabilized at 2.48%, while French bond yields increased to 3.23%. The British pound also strengthened, and UK government bond yields rose.
The European Commission is proposing that EU member states boost defense spending without exceeding the 3% GDP budget deficit threshold. According to the plan, military expenditures will increase by an average of 1.5% of GDP, providing an additional €650 billion over four years. An extension of a €150 billion loan program is also being considered. A final decision on these measures will be made at the EU summit of 27 leaders in Brussels.
Germany, despite legal restrictions under the "debt brake" law, plans to raise its defense budget by more than 1% of GDP. Political forces engaged in coalition negotiations are discussing the possibility of creating a special €500 billion fund for infrastructure investments and military modernization.
Analysts note that the euro’s rise reflects market confidence in the EU’s financial stability amid increased defense spending. Additional investments in the military sector could strengthen European economies by stimulating high-tech industries.
Financial experts predict that further euro appreciation is possible if the initiative is officially approved. However, potential increases in national debt and rearmament expenditures may spark debates among EU member states striving for budgetary discipline.
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