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Germany has had its "whatever it takes" moment. Friedrich Merz's move to loosen debt rules to revamp the military is a tectonic shift in a country renowned for its aversion to borrowing. Equity investors are cheering the prospect of the biggest spending spree since reunification in 1990 in Europe's largest economy.
German bond yields, on the other hand, leapt on the prospect of Berlin unleashing a fiscal bazooka, and the selloff has spread through the euro zone and into Asia. Ironically, the original "whatever it takes" moment back in 2012 when then European Central Bank Chief Mario Draghi pledged to save the euro, was a balm for bond markets. This time around, investors aren't concerned about the sustainability of German debt. Its debt to GDP level is around 62%, far below other G7 economies and S&P said this week a ramp-up in spending would be "positive" for Germany's prized triple-A rating. But higher German borrowing costs will elevate costs across the euro zone and that is something its more indebted neighbours need to keep an eye on.
Increased defence budgets don't automatically turbocharge wider economic growth. Estimates vary greatly on how much defence spending can boost GDP growth. In fact, many economists think the initial benefit is limited, with each euro of extra funding generally seen providing less than one euro of extra output. Citi, for example, doesn't expect a meaningful growth impact before 2027.
Nonetheless, the German move, coupled with the trade war unleashed by U.S. tariffs and the emergence of China as a tech race leader, have opened up a rare divergence in global stock markets. While the S&P 500 stock index is down 1.8% this year, European shares are up almost 9% and tech stocks in Hong Kong have surged almost 30%.
The European Central Bank did its bit for regional growth today, cutting rates for the sixth time since June and noting that rates were still restricting growth – keeping the door ajar to further reductions.
Investors have chopped their bullish bets on the dollar in half to around $16 billion since President Donald Trump's inauguration in January and with the euro shooting to a four-month high above $1.07, a number of banks have raced to ditch their recent calls for a drop to parity against the dollar.
It all points to investors recalibrating how to play Trump's whipsawing policy changes, weighing that a so-called "Trump put" supporting stock market prices may be fading. That policy uncertainty was on full display this week. Trump kickstarted his trade war with neighbours Canada and Mexico only to announce a one-month exemption for automakers.
The impact of Elon Musk's government job cuts, meanwhile, is starting to show. Layoffs announced by U.S.employers jumped to levels not seen since the last two recessions in February with government accounting for the bulk of the layoffs.
Over in China, Premier Li Qiang talked up consumption a lot in his speech to the annual meeting of the country's parliament. Spurring reluctant Chinese consumers to spend has been elevated to the top of Beijing's to-do list for 2025 but the words aren't yet being matched by deeds, according to economists.
And consumption was top of mind for us this week on the Reuters Econ World podcast. As shoppers forsake conglomerates in favor of smaller brands we look at the nightmare unfolding for Big Food across U.S. supermarkets and ask whether the age of the consumer giant is over. Listen here.
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