The European Union is united as it has ever been since the US hinted at cutting them loose from defense support. Thus it is clear that Europe is re-arming, and spending will be in the trillions of Euros.
The European economy has been struggling, and defense spending will help revive it. At the same time, Europe can allow interest rates to go up because they have inflation at a moderate level. In the end, trillions of dollars of spending will stimulate economic growth and take interest rates higher
Not all countries are positioned like Europe to get this type of growth boost. Europe is in a unique position.
Just recently it looked like the Euro was going to weaken to parity with the US dollar. Now it is 1.07 and showing upwards momentum. It can go higher.
Higher interest rates, a moderate inflation rate of 2.4% (a rate many would dream of), and more defense spending that will drive the economy, should support short-term Euro bond exposure.
Boosting defense spending has been talked about for some time, and many smart people got this wrong, saying Europe will never allow fiscal budgets to throw caution to the wind for defense spending, especially in a country like Germany.
Well, this was naive.
Many commented that Germany would never break their firm government spending rules for defense
Well, the new Chancellor-in-waiting Fredrich Merz put that idea to rest by convincing the other German parties to agree to exempt defense and security outlays from fiscal spending limits. They will even amend the constitution to allow for more spending on defense.
Germany is not the only player entering this game. A new Europe wide multilateral development bank is in talks with the US and other governments to push for a massive security spending boost in Europe. The bank will issue AAA bonds backed by shareholder nations to rapidly invest in defense procurement.
Increased defense spending in Europe is for real, and already being reflected in European capital markets.
The 10 year German bond hit a 15 month high, recording its biggest jump in yield since March 1990, months after the Berlin wall fell
The French 10 year French hit a 7 week high.
The prospect of increased defense spending sent the European stock index STOXX 50 up 1.3% the day after US tariffs were announced.
Even more surprising and a confirmation of the growth that can come from defense spending, the German stock market is up 3% in one day.
Money is flowing into Europe in both stocks and bonds.
New financing is coming, and the US looks ready to help with the financing.
This is the early stage of this new defense spending cycle and there is more to go.
So, in conclusion, when comparing Euro to the US, the Euro seems better at present.
US economic growth is in question until more is known about tariffs, and recent jobs numbers do not show economic strength.
Euro bonds look good for now.
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