Still, borrowing of the planned scale would have a significant impact. Moody's, a rating agency, estimates that Germany's deficit would widen by up to 2.5% of GDP (still below the EU average). The debt-to-GDP ratio could increase by 5 percentage points over the next two years.

FILE PHOTO: German Chancellor of the Social Democratic Party (SPD), Olaf Scholz and his conservative rival of the Christian Democratic Union (CDU) Friedrich Merz are pictured in a WELT TV studio ahead of a TV debate between Scholz and Merz, in Berlin, Germany, February 19, 2025. REUTERS/Fabrizio Bensch/Pool/File Photo

As in the rates space, FX markets have seen substantial moves as the euro’s prospects have been re-assessed. EUR/USD has had its largest five-day move since November 2022 and one-week realised volatility also sits close to the highest levels seen in two and a half years.

Friedrich Merz's CDU/CSU secured 28.52% of the vote while the far-right Alternative for Germany (AfD) secured 20.8% of the vote.

The European Union failed on Thursday to agree on a joint position on support for Ukraine after Hungary did not back a statement pledging further support for Kiev. A draft of the declaration, backed by the remaining 26 EU countries,