Germany holds the key to a secure Europe. It is vital that the country, at the continent's geographical, economic and political hub, is in the vanguard of European rearmament. Changes under way there will shape the course of German policy for years to come.
They will also shape the European bond market, of which German Bunds are the foundation.
Germany's Christian Democratic Union/Christian Social Union, Social Democratic Party and Greens will on Tuesday try to vote through the Bundestag and Bundesrat a reform of the constitutional debt brake that limits the annual federal structural deficit to 0.35% of GDP.
The reform would exempt defence spending above 1% of GDP, allow Germany's states to have 0.35% deficits too, and permit €500bn of borrowing for infrastructure investment.
The speed and gravity with which politicians like Friedrich Merz (pictured) have responded to the threat to European safety posed by President Donald Trump's administration in the US is commendable — even if critics rightly point out that the CDU had refused to reform the debt brake before this February's general election, when it would have been easier.
After Merz's U-turn, debt brake reform has been proposed on a faster and larger scale than most had anticipated.
Germany’s urgency echoes the tone across the European Union.
Ursula von der Leyen, president of the European Commission, is seeking to alter the bloc’s own fiscal rules to allow member states to borrow more for defence over the next four years without being penalised.
It is encouraging to see European politicians stepping forward confidently and seeking to build unity.
But there is no escaping the fact that this is a dark time for Europe. Trump has made it clear he is willing to make concessions to Russia and is ambivalent about defending Europe.
For European states, deciding to spend more to assure their own defence is one thing; carrying it out is quite another.
The costs will be huge, and will put enormous strain on Europe's politics and finances.
Already, the 10 year Bund yield has risen more than 30bp since Trump's unseemly row with President Volodymyr Zelensky in the Oval Office on February 28.
Europe has only three ways to pay for the bigger, better equipped armies it needs: borrow more, tax more or spend less on other things. None of these is palatable.
By loading up with more debt, countries will inevitably increase their credit risk. For Germany, rated triple-A, this may be manageable, but for countries like France (Aa3/AA-) and Italy (Baa3/BBB) this problem is absolutely paramount.
Borrowing can delay the pain for citizens, but not put it off forever.
Sooner or later, governments will need to get their deficits under control, and that will mean either higher taxes or spending cuts, most probably including welfare.
Either of these will provide fuel for a populist movement — sympathetic to Russia and disparaging of the EU — that is already running rampant across Germany and Europe.
The surge of left and right wing populism in France in its June 2024 election has contributed to a 60bp rise in its 10 year funding cost. Much worse is possible.
As President Emmanuel Macron’s woes have shown, fragmented politics with large votes for extremists will lead to more erratic policy making and deadlocks in parliament.
They can also, as in Hungary and Poland, weaken a country’s institutional strength.
All of these are pressure points for sovereign credit. Germany itself could feel the pinch.
Fundamentally, it is just not credible for Europe to sustainably spend as much of its GDP on defence as the US while spending more on welfare and also growing less.
Rearmament is, regrettably, necessary, and does need to be done fast.
But even as Europe, led by Germany, make decisions quickly, they should not be clouded by short term urgency.
Europe's new path leads to a difficult and costly future. Keeping European governments financeable will require some very difficult choices.