The market for joint EU bonds is likely to grow significantly in the coming years. In any case, the likelihood of this event has increased considerably following the outcome of Sunday’s German parliamentary elections, according to financial analysts, asset managers and institutional investors.
A key issue in the election was the extent to which the German government is allowed to borrow money. In 2009, Germany included in the Constitution that budget deficits could not exceed 0.35 percent of GDP. In recent years, this so-called Schuldbremse became an increasing obstacle to (necessary) government investments, especially in infrastructure and energy markets.
The intended coalition partners CDU/CSU and SPD do feel for easing the “brake,” but together they do not have the two-thirds majority needed to change the Constitution. Raymond Verstraelen (photo), manager of the government bonds portfolio team at Achmea Investment Management, therefore thinks a new German cabinet will look for alternatives to still be able to invest additionally in economic strength.
‘I do think there will be room to increase the budget deficit somewhat, probably by several tens of billions of euros. That could be done with special financial constructions. But when it also comes to expanding defense spending, that will not be nearly enough.’
An election result that would have allowed a constitutional amendment to the Schuldbremse would have given the German government many more opportunities to undertake additional defense spending itself. Verstraelen: “Now Germany will automatically turn more toward the European Union.
French asset manager Carmignac also sees this happening. ‘If the room for maneuver for national defense spending decreases, it could be good for the EU,’ Carmignac economist Apolline Menut (photo) said in a reaction to Sunday’s election results. 
‘Chancellor-designate Merz may be more amenable to joint EU loans.’
Joost van Leenders, investment strategist at Van Lanschot Kempen, already saw this coming. Back in January, he wrote: “Discussions in Brussels about innovative financing of common defense programs through the European Investment Bank and/or issuance of EU bonds, may become easier after this election result.
900 billion in five years
The EU bond market now amount to about 550 billion euros, Verstraelen (Achmea IM) said. Most of it consists of the joint bonds under the NextGenerationEU program set up in corona time. ‘The EU would like index providers to classify these bonds as government bonds, but that hasn’t happened yet. But they are covered by the EU budget, so you can call them state-guaranteed. In terms of yield, they are close to French government bonds.’ If the EU countries do indeed jointly enter the capital market in the coming years to finance the additional defense spending, Verstraelen foresees an expansion of that market by about 900 billion euros in five years.
The impact of the German election result on financial markets remained extremely limited Monday. “Not negative” was the general verdict. A number of smaller parties did not reach the electoral threshold, which allowed CDU/CSU and SPD together to achieve a majority in the Bundestag. 
Van Leenders (photo): “That will hopefully lead to a more stable coalition, which could boost sentiment in Germany. A government is also expected to be in place relatively soon. Incoming Chancellor Friedrich Merz said Monday he expects to have an agreement with the SPD before Easter.