The agreed four-day cease fire between Israel and Hamas starts today. Both camps will release hostages and humanitarian aid will be allowed into Gaza. While perhaps promising to the outside world, both camps make sure to bring across the cease fire is temporary and should not at all be interpreted as a start of the end of the war. Indeed, according to Reuters, a spokesperson for Hamas in a video message called for an “escalation of the confrontation with (Israel) on all resistance fronts”, including the Israeli-occupied West Bank. In addition, an Israeli military spokesperson warned that “control over northern Gaza is the first step of a long war, and we are preparing for the next stages”.
While rather futile in light of such news, let’s turn to markets closer to home. Dutch bond yields hardly widened vis-à-vis their German counterparts yesterday, following the political shockwave in the Netherlands. Yet the whole European bond building shook a little as the German government decided to suspend its debt brake in order to allow for increased borrowing. That decision was a big climbdown for ‘frugal’ FDP finance minister Christian Lindner. Indeed, it was a painful defeat for the coalition as a whole, since the debt brake, which limits the amount of new debt to 0.35% of GDP in normal times, was reinstated earlier this year after being dormant for three years during the pandemic and the energy crisis.
The suspension followed on the heels of last week’s ruling by the Constitutional Court in Karlsruhe, saying that the German government unjustly relabelled EUR 60bn in unspent off-balance sheet pandemic funds for climate investments. This implies that the fund can no longer be held off-balance sheet and that any spending that was planned with the fund would have to run through the budget. Spending on projects that is not yet committed can be cancelled, but the government will have to honour any commitments already made (estimated at EUR 37bn, about 1% of GDP). This left a gaping hole in the 2023 budget, which has thus forced the government to temporarily suspend the debt brake.
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