Germany’s parliament has sanctioned a significant surge in spending, marking a departure from years of fiscal conservatism, with the aim of stimulating economic growth and enhancing military expenditure for a new phase of European collective defense.
This endorsement in the Bundestag provides a substantial boost to conservative leader Friedrich Merz, granting the chancellor-in-waiting access to hundreds of billions of euros for ramping up investments following two years of contraction in Europe’s largest economy.
Under pressure to strengthen their defenses in light of an aggressive Russia and shifts in U.S. policy under President Donald Trump, Germany and other European nations are striving to ensure their security.
We need your consent to load this rte-player content. We utilize rte-player to manage additional content that may set cookies on your device and gather data about your activity. Please review their details and accept them to load the content. Manage Preferences. Mr. Merz’s conservatives, alongside the Social Democrats (SPD), who are negotiating to form a centrist coalition following last month’s election, aim to establish a €500 billion fund for infrastructure and modify constitutionally mandated borrowing rules to facilitate increased defense spending.
“The decision we are making today regarding defense readiness … represents nothing less than the first significant step towards a new European defense community,” he stated.
Next, the legislation must be reviewed by the Bundesrat, the upper house that represents the governments of Germany’s 16 federal states.
A major obstacle to its passage appeared to diminish yesterday when the Bavarian Free Voters agreed to support the proposals.
The conservatives and SPD were eager to pass the legislation through the outgoing parliament, fearing it might face opposition from an expanded contingent of far-right and far-left representatives in the next Bundestag convening on 25 March.
Germany has faced pressure to bolster its defenses amid changes in U.S. policy.
Mr. Merz has defended the expedited timeline due to the swiftly evolving geopolitical climate.
The proposals have already elevated euro zone yields, the euro, and European stocks over the past week.
Germany’s blue-chip DAX index, which had been nearing record highs before the vote, saw some gains recede, while yields on ten-year bonds slightly decreased following the widely anticipated endorsement of the spending plan.
The euro, which has gained strength recently with news of the agreement, eased slightly.
“This decision has the potential to redefine our nation’s history, signaling a positive beginning for Germany and for Europe,” asserted SPD leader Lars Klingbeil.
“Europe is facing an aggressive Russia on one side and an unpredictable United States on the other.”
Easing the debt brake
The reforms represent a significant rollback of the so-called debt brake imposed following the 2008 global financial crisis, a measure that has since been criticized as outdated and constraining for Germany’s fiscal policy.
The prospects of a borrowing surge have elevated German investor confidence more than anticipated, according to the ZEW economic research institute.
The construction industry can expect an influx of resources from the fund to revamp Germany’s aging infrastructure, while the defense sector is also poised to benefit.
“The anticipation of a fiscal bonanza is driving expectations to new heights. In the absence of tariff disputes, these expectations could have been even brighter,” remarked Alexander Krueger, chief economist at the private bank Hauck Aufhäuser Lampe.
Conservative leader Friedrich Merz is pictured speaking in the Bundestag.
However, critics, including some within his own party, accuse Mr. Merz of “voter fraud” for initially pledging fiscal restraint during the campaign only to announce a shift in fiscal policy shortly after achieving victory.
“A politician’s most valuable asset is credibility,” stated Tino Chrupalla, co-leader of the far-right Alternative for Germany (AfD), during the discussion.
“With these disconcerting actions, Mr. Merz, you have utterly squandered yours. Voters feel betrayed by you, and rightfully so.”
Economists warn that additional reforms are essential, such as reducing bureaucracy, to ensure sustainable growth.
Fitch Ratings has also cautioned that Germany’s esteemed AAA credit rating could face pressure in the long term if its expansive spending strategy is not balanced by consolidation measures or fails to yield lasting growth improvements.
