Merz Secures Key Support for Debt-Funded Defense and Infrastructure Deal

Friedrich Merz, the likely next chancellor of Germany, announced on Friday that he had reached an agreement with the Green Party to approve significant government spending on defense, infrastructure, and climate-related projects.

The deal, which marks a major shift in German fiscal policy, is expected to secure the votes needed to pass the measures in parliament next week.

The agreement includes a provision to exempt military spending above 1% of Germany’s gross domestic product (GDP) from the country’s constitutional debt limit. This broad definition of defense spending would also cover intelligence, cybersecurity, and civil protection, effectively allowing Germany to increase its military budget significantly.

“There will no longer be a lack of financial resources to defend freedom and peace on our continent,” Merz stated. “Germany is back and is making a major contribution to securing Europe’s stability.”

To gain support from the Greens and the center-left Social Democrats (SPD), who are negotiating to join his government, Merz and his center-right Christian Democrats agreed to a €500 billion ($544 billion) infrastructure investment fund. This fund, which will be financed through borrowing outside the constitutional debt limits, is designed to address Germany’s economic slowdown and improve its aging infrastructure.

A key element of the compromise with the Greens includes allocating €100 billion from the fund to Germany’s existing climate and transformation initiative, a demand the Greens had previously set as a condition for their support.

Merz, who is pushing to secure parliamentary approval before a new session begins on March 25, has justified the urgency of the plan by pointing to shifting US policies under President Donald Trump. He has warned that Europe could be left vulnerable if the US withdraws security commitments, making it necessary for Germany to take a more active role in its own defense.

“It is a clear message to our partners and to the enemies of our freedom: We are capable of defending ourselves,” Merz said.

News of the deal had an immediate impact on financial markets. Germany’s DAX stock index rose nearly 2%, while smaller-cap indices gained more than 3%. The euro also strengthened by 0.5%, reflecting market optimism that the increased government spending could boost the broader European economy.

The agreement also signals a major shift in Germany’s long-standing fiscal discipline, which has historically imposed strict debt limits. Some analysts believe this could mark the end of the so-called “debt brake,” a rule introduced after the 2008 financial crisis that restricts government borrowing.

“With today’s plan, the debt brake might not be entirely dead, but it is certainly being buried alive,” said Carsten Brzeski, global head of macro at ING.

The proposed measures require a two-thirds majority in parliament to amend Germany’s constitutional debt rules. With support from the Greens, the Christian Democrats, and the SPD, the coalition appears to have the necessary votes to pass the plan next week.

However, opposition is expected from both the far-right and far-left factions, which have gained more seats in parliament and could challenge the package once the new session begins.

Reuters, CNBC, the New York Times, and Bloomberg contributed to this report.