German lawmakers have reached an agreement to exempt some defense spending from the nation’s tight rules on running up debt.

Optimism was already building among economists on German and euro zone growth in a Reuters poll taken just before key political parties in Germany agreed a historic deal on debt, suggesting bigger revisions to forecasts in coming days.

Germany’s chancellor-in-waiting Friedrich Merz reached an agreement with the Greens party on a fiscal reform package for large investments on infrastructure and defense, according to a report by newspaper Handelsblatt.

Germany’s next chancellor, Friedrich Merz, struck a deal to loosen borrowing limits, unleashing €500 billion for defence and infrastructure. Markets surged, while analysts debated its impact on inflation and ECB rate policy.

By Samuel Indyk, Harry Robertson and Dhara Ranasinghe LONDON (Reuters) -European stock markets rallied on Friday as news of an agreement between German political parties on a historic debt deal added to optimism that has swept across the region,