LONDON (Reuters) – Euro zone shares and the euro rallied on Friday following news that German Chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on a massive increase in state borrowing just days ahead of a parliamentary vote next week.
In contrast, German borrowing costs rose as investors took the latest developments of a further sign that increased spending in Europe’s largest economy will lead to more bond sales.
A debt deal compromise is being examined by finance ministry officials, parliamentary sources said.
Germany’s benchmark DAX index jumped 1.7% to a one-week high, while mid- and small-caps rose 2.6% and 2.7%, respectively.
The euro was last up 0.5% to $1.0903, and was up 1.2% against the yen and 0.5% against the pound.
Merz wants the outgoing German parliament to approve a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules to revive growth and ramp up military spending in the continent’s largest economy.
Germany’s 10-year government bond yield, the euro area benchmark, was last up 7 basis points at 2.92%.
The 30-year bond yield rose to its highest since October 2023 at 3.247%.
“What would be interesting to see is if the 3% ceiling for Bund yield breaks before these plans come into fruition,” said Richard McGuire, head of rates strategy at Rabobank.
“This is positive for Germany but there are questions marks on how quickly the plans can be delivered.”
(Reporting by Samuel Indyk and Dhara Ranasinghe, editing by Alun John)
