Parties negotiating to form Germany’s next government have reached a tentative agreement to establish a 500-billion-euro ($536.9 billion) infrastructure fund and overhaul existing borrowing rules, signaling a potentially seismic shift in spending policy for Europe’s largest economy, Al Jazeera reports.
The proposals, spearheaded by Friedrich Merz of the conservative CDU/CSU and the Social Democrats (SPD), who are currently in coalition talks following last month’s national election, are expected to be presented to the outgoing German parliament (Bundestag) next week.
The move comes amid growing geopolitical uncertainty, particularly following the potential return of Donald Trump to the White House and the implications for the transatlantic alliance. Merz, the likely next chancellor, has emphasized the urgent need for Europe to bolster its own defense capabilities.
The urgency has been amplified by recent events, including the freezing of military aid to Ukraine by the US after a clash between President Trump and Ukrainian leader Volodymyr Zelensky. This has fueled concerns that the US could pursue a deal with Russia to end the war in Ukraine while simultaneously disengaging from European security.
Economists and investors have long advocated for Germany to reform its constitutionally enshrined state borrowing limits, known as the “debt brake,” to unlock investment and stimulate an economy that has contracted for the past two years. The proposed reform would essentially roll back borrowing restrictions implemented after the 2008 global financial crisis, which many now consider outdated and restrictive to Germany’s fiscal flexibility.
Merz stated that the CDU/CSU and SPD will submit a motion to the Bundestag to amend the constitution. This amendment would exempt defense expenditures exceeding 1 percent of Germany’s economic output from the debt brake limitations.
Furthermore, a commission of experts will be tasked with developing a proposal to modernize the debt brake on a permanent basis, aiming to boost investments across various sectors.
The United States has consistently pressured Germany to increase its defense spending and modernize its military, which has been perceived as neglected since the end of the Cold War. Additionally, Germany has diverted weaponry to Ukraine.
