The German Bundestag has officially approved a significant increase in defense spending as part of a broader strategy to reinforce European military capabilities in the wake of the ongoing conflict instigated by Russia against Ukraine.

Chancellor-elect Friedrich Merz stated in his address to the parliament that allies within the European Union and NATO are closely observing Germany’s efforts, emphasizing the necessity of a robust defense against threats to democratic order.

This new initiative includes a provision for a €500 billion defense fund over the next decade, aimed at modernizing and expanding Germany’s military resources.

On March 18, 2025, the lower house of parliament passed the controversial defense spending bill with a vote tally of 513 in favor out of 733 total votes.

This significant support from the conservative bloc, as well as backing from the Social Democrats (SPD) and the Greens, allowed the coalition to exceed the minimum one-third majority required to initiate such expenditure.

Merz articulated that the current geopolitical landscape necessitates a reevaluation of Germany's fiscal policies, specifically those related to defense spending, which historically have been constrained by austerity measures.

The proposed legislation will proceed to the Bundesrat (the upper chamber) for final approval on March 21, 2025. The coalition of four major parties holds a combined total of 520 seats, well above the one-third threshold needed.

Investor confidence in Germany showed a notable increase, reaching 51.6 points as per the latest report from the ZEW Economic Research Institute, reflecting the anticipation surrounding the parliamentary vote.

This figure represents the highest investor sentiment level recorded since 2022. Achim Wambach, president of the ZEW, indicated that the rise in confidence likely correlates with expectations for Germany’s fiscal policy moving forward.

Parallel to this legislative development, defense stocks experienced a positive trading session.

ThyssenKrupp shares surged by 10.5%, suggesting that the company could be a primary beneficiary of the increased defense budget.

Other defense contractors, such as Rheinmetall, saw their shares rise by 4%, while BAE Systems witnessed a modest increase of 0.34%.

Despite this optimistic outlook for defense spending, the Organisation for Economic Co-operation and Development (OECD) has tempered expectations for Germany's economic growth, forecasting a mere 0.4% increase in GDP for 2025, a reduction from the previous estimate of 1.1%.

The agency attributed this downgrading to ongoing economic challenges that confront the nation.

In a related financial market development, German government bonds, or bunds, continued to see high sales activity, with ten-year sovereign bond yields rising by 50 basis points to levels not seen since 2023.