By Brian Swint

Germany is doing what President Donald Trump wanted. It might work so well that it makes the U.S. stock market look bad.

The country's incoming chancellor negotiated a deal with other parties in government to bolster spending by more than $500 billion on Monday evening -- with the focus on defense and infrastructure such as roads, railways, and power grids.

It's a clever move for several reasons by Friedrich Merz, the leader of the CDU party that won the most seats in the Bundestag at last month's election. It's designed to get around Germany's constitutional requirement to keep deficit spending within strict limits by calling it emergency funding. And by pushing it through the legislature before the next session, it prevents the opposition parties that did well in the February election from blocking it.

It's also what Trump wants -- namely for Europe to shoulder more of the burden for its own security. Trump is pulling back support for Ukraine, which is still fighting three years after Russia invaded it. The threat from Moscow is seen as growing if President Vladimir Putin is able to end the conflict on favorable terms.

Furthermore, the German economy is desperate for a boost. It has stagnated since the Covid-19 pandemic and the autobahns and factories that helped bring about the Wirtschaftswunder, or economic miracle, after World War II are in urgent need of upgrades.

The country's blue-chip DAX stock index surged on the announcement, climbing 3.5% on Wednesday. That comes a day after the S&P 500 sank as Trump's new tariffs on Canada, Mexico, and China kicked in.

The German market's outperformance since the start of the year is getting stronger. The DAX has gained 16% since Jan. 1, whereas the S&P has given up all its gains and is now down 1.8%.

Infrastructure firms were doing particularly well Wednesday. Heidelberg Materials, which makes cement, was up 13%, and Siemens Energy added 10%, and chemicals firm BASF rose 9%. Defense contractor Rheinmetall was only up 4% on the day, but has soared 90% since the start of the year. Banks were also doing well, led by the biggest lenders Deutsche Bank and Commerzbank.

German bonds are also reacting strongly to the new spending plans. The yield on the 30-year bund jumped by the biggest amount since 1998.

To be fair, German stocks have underperformed the U.S. market for the past few years. But it looks like the tide is turning, thanks in no small part to Donald Trump.

Write to Brian Swint at brian.swint@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 05, 2025 06:17 ET (11:17 GMT)

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