Germany’s borrowing costs surged to their highest level in 28 years on Wednesday. Investors are confident that the country’s struggling economy will receive a significant boost following a historic agreement between the CDU and SPD to fund investments in the military and infrastructure.

The yield on the 10-year German government bond, the Bund, rose by 0.25 percentage points to 2.73%, marking its largest single-day increase since 1997.

On Tuesday, prospective Chancellor Friedrich Merz reached an agreement with the Social Democrats (SPD) to exempt defense spending exceeding 1% of GDP from Germany’s strict constitutional debt brake, establish a €500 billion off-balance sheet fund for debt-financed infrastructure investments, and relax debt rules for the federal states.

Deutsche Bank economists described the agreement as “one of the most historic paradigm shifts in Germany’s post-war history,” claiming, “Both the speed at which this is happening and the magnitude of the potential fiscal expansion are reminiscent of German reunification.”

Goldman Sachs analysts stated that if the package is approved and implemented swiftly, it could boost Germany’s economic growth by up to 2% next year. The bank’s current forecast is 0.8%.

The German economy, grappling with high energy costs, weak investment, and sluggish consumer demand, has contracted for two consecutive years.

The euro rose by 1.2% against the dollar, reaching $1.075, its highest level since November, and German stocks also rallied.

Merz plans to push the changes through parliament this month, before newly elected members of the Federal Parliament take their seats. This urgency is driven by the critical role that the AfD and Die Linke are expected to play in the new parliament, where they could block any constitutional amendments in the upcoming legislative period.

However, the agreement between Merz’s CDU/CSU bloc and the SPD still requires the support of the Greens to achieve the two-thirds majority needed to amend the constitution.

The Greens have long called for reforms to the so-called “debt brake,” but senior party officials have indicated that they first need to digest the details of the plan. Commentators expect the party to eventually approve the plan.

The movement in German bonds also sharply increased yields in other Eurozone countries.

Germany’s Dax index, which had fallen on Tuesday following the US imposition of tariffs on some trading partners, rose by 3%.

German infrastructure companies were among the biggest gainers, with Heidelberg Materials rising by 15% and Siemens Energy gaining almost 9%. Thyssenkrupp, Germany’s largest steel producer, gained approximately 13%.

Europe’s defense sector continued its rapid ascent. Shares in Rheinmetall, the country’s largest defense company, rose by approximately 5%, while Thales, listed in Paris, also rose by 6%.

The gains spread to other European markets, with the continent-wide Stoxx Europe 600 rising by 1%.

US stocks remained stable at the opening on Wednesday. The dollar fell by 0.9% against a basket of six currencies, including the euro and the British pound.

For weeks, Karol Nawrocki, the presidential candidate of the Law and Justice (PiS) party in Poland, who has been sharply criticizing Ukrainian President Volodymyr Zelenskyy, has now taken a hard line against Russia, even calling for the severance of diplomatic relations with Moscow.

In a recent interview with Wirtualna Polska, Nawrocki stated that he could sit at the negotiating table with Vladimir Putin and Zelenskyy, and even shake Putin’s hand if it were in Poland’s interest.

Nawrocki said, “Trump, Zelenskyy, Putin, and I would sit at the table and discuss whether Ukraine would be a stable buffer between the Russian Federation and Poland.”

On Monday (March 3), in an interview with Radio ZET, he responded affirmatively to the question of whether Poland should sever diplomatic relations with Russia. “My view is that it is not good for Poland to maintain diplomatic relations with a barbaric state,” Nawrocki said.

Then, on Tuesday, when Polsat News asked about the apparent contradiction in his stance towards Russia, he said, “In an ideal world, states like Russia – post-Soviet, neo-imperial, cruel, and barbaric – should not have diplomatic relations and should be isolated.”

Nawrocki’s stance on this issue is even more contradictory, given his criticism of Zelenskyy in recent weeks. In the same interview with Radio ZET, he stated that the Ukrainian President “behaved inappropriately towards his allies, including Poland.”

The PiS candidate added, “He claimed that Ukraine was left alone at the beginning of the war, which shows a lack of recognition for the significant efforts of the Polish people and the Polish president.”

Nawrocki trusts Trump

Speaking at the Local Government Congress in Mikołajki, Northern Poland, on Tuesday, Karol Nawrocki stated that he believes Donald Trump will ensure the security of Central Europe, including Poland.

Referring to the discussion between Trump and Zelenskyy at the White House on Friday, Nawrocki said that the Ukrainian leader “cannot afford to succumb to the pressure of the anti-American rebellion in the EU, which includes our country’s Prime Minister Donald Tusk.”

Following Friday’s events, Tusk wrote on X, “Dear President Zelenskyy, dear Ukrainian friends, you are not alone.”

Tusk also suggested that Nawrocki is a candidate who aims to “serve Russian interests in Poland, whether out of stupidity or calculation.”

Tusk’s candidate favors continued support for Ukraine

Rafał Trzaskowski of Tusk’s Civic Platform (PO), Nawrocki’s main rival in the elections, consistently demonstrates a pro-Ukrainian stance.

During a briefing in parliament on Tuesday, when asked about the US suspension of aid to Ukraine, he expressed his hope that “this would be a kind of signal.”

“I am saddened that such a decision has been made, but above all, this decision should lead us to draw a conclusion. As Europe, we must do more to help Ukraine,” he said.

PiS denies candidate change

Meanwhile, a survey conducted by SW Research for Wprost weekly reveals that most Poles believe Sławomir Mentzen, the candidate of the far-right Confederation, has a chance to advance to the second round alongside Trzaskowski instead of Nawrocki.

According to another survey by Opinia24, former Prime Minister Mateusz Morawiecki (PiS) is a potential presidential candidate who could receive more support than Nawrocki, especially if there is an economic crisis in Europe.

However, PiS leader Jarosław Kaczyński has denied claims that the party is considering changing its candidate.

“This is our candidate. We have no other candidate,” Kaczyński said at Nawrocki’s election rally on Sunday.

Since the war reached Europe’s doorstep in February 2022, defense companies have significantly increased their presence in Brussels.

According to a data analysis by POLITICO, the lobbying budgets of Europe’s largest defense companies rose by approximately 40% between 2022 and 2023.

Most of these companies have expanded their Brussels-based teams in the last three years to meet the growing demand for influence in the European Union’s capital.

“We are seeing unprecedented interest driven by the stark reality of the security environment,” said Line Tresselt, partner and director of the defense and security group at Rud Pedersen, a public affairs consultancy that has advised the defense sector for two decades.

While European arms manufacturers want EU funds to go to local companies, foreign firms are also seeking a share of the pie.

“This is more than just a response to the large-scale invasion of Ukraine: With EDIP [the €1.5 billion European Defence Industry Programme], the European Defence Fund, the upcoming EU defense white paper, the newly appointed defense commissioner, and NATO’s changing posture… there is a huge increase in EU-made policies for the sector,” Tresselt said.

The top 10 EU defense firms (Airbus, Leonardo, Thales, Rheinmetall, Naval, Saab, Safran, KNDS Deutschland, Dassault, and Fincantieri) are required to declare their lobbying activities in the EU Transparency Register when lobbying in member states.

Archives from the LobbyFacts database, created by NGOs, also allow for a comparison with previous records from the beginning of 2022 and 2023.

In 2022, the cumulative spending of the top 10 ranged from €3.95 million to €5.1 million; in 2023, this figure rose to between €5.5 million and €6.7 million.

Considering the lower ends of the range, this represents a 40% increase in just one year.

This trend is particularly evident with the Swedish defense giant Saab, which doubled its spending; followed by Airbus and Dassault, which significantly increased their lobbying activities.

In addition to increased budgets, most of these companies have strengthened their teams. 90% of the surveyed firms reported hiring additional full-time staff to represent their interests in Brussels in 2024.

Thales led the way, increasing its lobbying team from 3.5 to 10 people. Leonardo followed, expanding its team from 3 to 5.

Tresselt added that companies that once focused on national markets like Germany and Poland due to the US military presence are now establishing a presence in Brussels as well.

For example, US defense giant Lockheed Martin registered in the EU lobbying register for the first time last May and has already assigned two lobbyists to the European Parliament.

Meanwhile, US aerospace firm RTX also has two full-time lobbyists and four external representatives advocating for its interests in Brussels.