In response to perceived threats from the Trump administration, Europe is undergoing significant policy changes that could last beyond his presidency. European leaders recognize the need to address their stagnant economies and respond to potential U.S. tariff actions. Germany's future chancellor, Friedrich Merz, aims to loosen the debt brake, enabling increased borrowing for defense and infrastructure, signaling a historic shift in fiscal policy. This movement has already influenced the bond market, evident by rising yields, indicating a potential transformation in Europe's economic landscape amidst uncertainty and contraction.
"Whereas Trump's first four years the Europeans viewed him as an accident, I think they see now he's no accident," Gordon Sondland, the former U.S. ambassador to the EU under Trump, tells Axios.
In view of the threats to our freedom and peace on our continent, the rule for our defense now has to be 'whatever it takes,'" Merz said at a press conference this week.
For proof of the historic nature of Germany's shift, look to the response in the bond market: Yields on the 10-year bund jumped more than 30 basis points in a single day, raising the nation's cost of borrowing.
The scale of investment could help transform Europe's largest economy at a perilous time. It has been contracting since 2023, and Trump's proposed tariffs - set to take effect imminently - could add to the pressure.
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