Germany's shift toward increased defense spending has pushed government borrowing costs higher across the Eurozone. Ten-year German Bund yields have climbed to nearly 3 percent this month, the highest since a global bond sell-off in 2023. This has created a ripple effect through the bloc's financial markets, according to state media.

The change represents a significant departure from Germany's traditional reluctance to borrow, which previously led to scarcity of Bunds and negative yields. The country's new "whatever it takes" approach to military and infrastructure spending is affecting all Eurozone members due to German debt's role as the bloc's benchmark.

French 10-year yields have exceeded 3.6 percent, reaching their highest point in more than a decade—surpassing levels seen during France's political crisis last year. Italian yields have touched 4 percent for the first time since July 2023.

The scale of Germany's commitment became clear when conservative leader Friedrich Merz secured a €500 billion infrastructure fund, including €100 billion for climate initiatives. The deal also exempts defense spending over 1% of GDP from debt restrictions, allowing Germany to significantly boost military investment amid growing security concerns.

Investors warn this yield increase could limit other countries' ability to expand their own defense budgets. "The rise in yields could eclipse fiscal space for an increase in defense spending outside of Germany," particularly in France and Italy, according to Sören Radde, head of European economic research at hedge fund Point72.

Analysis by Point72 shows that without compensatory measures, higher defense spending combined with rising yields could push:

• Italy's debt-to-GDP ratio to 153 percent by 2030 (from around 140 percent)
• France's debt-to-GDP ratio to 122 percent by 2030 (from around 115 percent)

So far, spreads—the additional costs countries pay relative to Germany—have remained fairly stable. The euro has also strengthened, showing optimism about potential economic growth. However, fund managers warn these fiscal pressures could increase if other Eurozone economies follow Germany's example.

Some investors see potential benefits in Germany's increased borrowing. Gareth Hill from Royal London Asset Management noted that European government bond yields have historically been "too low compared to other global bond markets" due to Germany's self-imposed fiscal discipline. Additionally, greater liquidity in Bunds could help establish the euro as a rival reserve currency to the dollar by creating what Goldman Sachs Asset Management's Simon Dangoor calls "a useful Eurozone triple-A reserve asset."