Welcome to the Brussels Edition, Bloomberg’s daily briefing on what matters most in the heart of the European Union.

The German election results delivered a seismic reordering of the country’s political landscape, but offered a measure of comfort to those hoping for a stable government in Berlin as Europe faces a costly rearmament race and a possible trade war with the US. Friedrich Merz has the mandate to form a coalition and become Germany’s next chancellor after his conservative Christian Democratic-led bloc won 28.6% of the votes, while the Alternative for Germany vaulted into second place for the best result of a far-right party in the country since World War II. Just like Olaf Scholz, Merz will need to govern with the help of other parties. A less unwieldy coalition with Scholz’s Social Democrats, which hemorrhaged support, appears possible. An upstart left-wing faction, BSW, failed to clear a 5% threshold to enter the Bundestag, preliminary results showed, meaning a less-crowded parliament. The Free Democrats, which had controlled the Finance Ministry until November, were also eliminated. The euro rose as investors expect the result to usher in increased defense spending after the Trump administration’s clear message that Europe is on its own.

— Jorge Valero

What’s Happening

Ukraine Support | The college of commissioners will visit Kyiv today together with other leaders, including European Council chief Antonio Costa, who called a special summit for March 6 with the goal of agreeing on an additional €20 billion in military aid for Ukraine. EU foreign affairs ministers will adopt the 16th sanctions package as the block works on options to seize Russia’s central bank assets, we’re told.

Painful Partnership | The European Commission estimates that the first wave of the US steel and aluminum tariffs will hit as much as €28 billion of the bloc’s exports, we’re told, although it would depend on how the duties are finally applied. Trade Commissioner Maros Sefcovic told EU ambassadors that his first meeting with the Trump administration was not a negotiation, but rather explaining EU policies. 

Greening Down | The commission is set to propose a significant watering down of the bloc’s sustainability rules as part of its regulatory review on Wednesday. The  changes include limiting corporate obligations to monitor potential ESG breaches in supply chains and reducing potential fines, according to a draft we’ve seen.

Slippery Path | ECB governing council member Jose Luis Escriva said monetary policy must be approached with caution given the current “extraordinary uncertainty.” It’s advisable “to wait for doubts around certain issues to be cleared, see how the different geopolitical dynamics are resolved,” he told La Vanguardia newspaper.

Around Europe

Difficult Deal | Ukrainian President Volodymyr Zelenskiy said he would trade his presidency for NATO membership if such an offer were made. He also told reporters that the US dropped its demand for Ukraine to commit to paying $500 billion as part of talks to give the US a cut of its mineral wealth, but he insisted on demanding military support as part of the potential agreement.

Caught Off-Guard | Italian Prime Minister Giorgia Meloni has privately been staggered by the magnitude of attacks on foreign affairs principles by Trump and his administration, we’re told. Still, she praised him over the weekend in a conservative rally, but warned that a tariff war “would play into the hands of other great powers.”

Leaving Elysee  | French President Emmanuel Macron’s top aide, Alexis Kohler, is preparing to join Societe Generale, according to L’Opinion. He has been Macron’s chief of staff since he was finance minister and would lead the bank’s retail arm if he gets the green-light from the country’s transparency watchdog.

Pope Latest | The respiratory crisis that Pope Francis suffered in his week-long battle against pneumonia subsided Sunday, but he is still receiving high-flow oxygen and also underwent new tests, Ansa news agency reported. In a written Sunday mass homily, he said he was “confidently” continuing his hospitalization.

Chart of the Day

There’s currently a proliferation of portfolios focused on defense assets, a sector that was seen by money managers as too controversial to touch not so long ago. Data compiled by Bloomberg shows the number of defense-themed funds doubled last year to a record 47. Even investors focused on ESG metrics are now softening their strict exclusion policies to make room for defense assets.

Today’s Agenda

• Ukrainian President Volodymyr Zelenskiy meets European Council President Antonio Costa and other leaders in Kyiv to mark the third year since Russia's invasion 
• EU foreign ministers meet in Brussels
• Ministers in charge of agricultural policy meet in Brussels
• EU-Israel Association Council held in Brussels with EU top diplomat Kaja Kallas and Israeli Foreign Minister Gideon Sa'ar