BERLIN – Germany has shown it remains capable of action in situations of severe pressure – even without a properly installed government.
While still engaged in talks on forming a new coalition government with CDU leader Friedrich Merz at the helm, the leaders of the conservative Christian Democratic Union (CDU), their Bavarian allies the Christian Social Union (CSU), and the Social Democrats (SPD) went public on Tuesday with an agreement to abandon years of cautious German fiscal policy.
The leaders proposed an unprecedented, debt-funded injection into Germany’s security architecture and wider infrastructure – a response to difficult parliamentary majorities, years of underfunding, and global upheaval around America’s future commitment to Europe’s security.
The total investment could amount to some €1 trillion over the next years, which is more than the EU’s entire pandemic recovery fund.
Here is everything that we know about the plans so far:
What was agreed?
The leaders proposed to reform the country’s constitutional deficit limit, the so-called debt brake, which limits Germany’s structural deficit to 0.35% of GDP. According to the plans, defence spending above the level of 1% of GDP would be exempt from the rule.
This would allow Germany to debt-fund potential increases in NATO’s 2% spending target, which might require it to spend at least an additional €140 billion a year from 2028 – nearly triple the current defence budget.
Secondly, a new extra-budgetary special fund worth €500 billion would be created to be invested into Germany’s creaking infrastructure.
Furthermore, the parties want to loosen particularly strict debt rules for Germany’s regional states.
Negotiators also agreed to set up an expert commission that would propose fundamental “modernisation” of the debt brake. That update should be completed by the end of the year.
The first three measures are supposed to be completed with the majorities of Germany’s old parliament, which remains in session before Germany’s newly elected parliament reconvenes in March.
How much could Germany spend?
According to the plans, at least €500 billion would be designated for investment into Germany’s creaking infrastructure over the next ten years. No concrete figures were named for defence matters.
German media reported, however, that negotiators were considering an estimate by four influential economists that the country needs to invest an additional €400 billion into its own defence over the next years.
Together with Germany’s existing €100 billion special fund for its armed forces, which expires in 2027, that would bring the country’s large-scale investment programmes up to €1 trillion.
Can Germany afford this?
Germany retains a top credit rating and debt levels are way below the EU average at 62.8% after years of cautious fiscal policies, which makes new debt relatively cheap.
Still, borrowing of the planned scale would have a significant impact. Moody’s, a rating agency, estimates that Germany’s deficit would widen by up to 2.5% of GDP (still below the EU average). The debt-to-GDP ratio could increase by 5 percentage points over the next two years.
This is bound to make German debt more expensive. The country’s borrowing costs surged on Wednesday morning in expectation of new debt. At around 2.7% that was still significantly below those of other major economies – and German markets also surged.
The long-term growth generated from the investment could offset the cost.
“Such an increase in spending would support economic growth beyond 2026, Germany’s main credit constraint,” Moody’s Senior Vice-President Steffen Dyck, who welcomed this as a “positive signal”.
Why is this necessary?
The party leaders made it clear that Donald Trump’s announcement to halt military aid to Ukraine were a spur to agree on a package this week. Lingering uncertainty over America’s future support for European security, which remains underfunded, had put the possibility of a new debt-funded injection on the table in the first place.
On infrastructure, Merz said that investment was necessary to lead the German economy – which has been in a recession for two years – back to growth. Germany’s roads, railway networks, and bridges are creaking after decades of neglect.
Why is it so rushed?
Unfavourable majorities in the newly elected parliament prompted negotiators to get the agreement over the line while the old parliament technically remains in session – even before completing coalition talks.
The far-right Alternative for Germany (AfD) and the socialist Left party, which are critical of higher defence expenditures, hold a blocking minority against constitutional changes in the new parliament. Those would be necessary to circumvent Germany’s strict debt rules conflicting with investment on such a large scale.
Did Merz take a position on joint European measures?
Europe would need to “make great efforts very quickly” to strengthen its defence capabilities, Merz said. With the new investment package, Germany was aiming to “rapidly lead on this way, step by step,” he added. But he remained silent on joint European measures.
Germany has so far excluded the possibility of new common debt. However, yesterday’s proposal by European Commission President Ursula von der Leyen to unlock €800 billion in European defence spending was going in the right direction, a spokesperson of the incumbent Chancellor Olaf Scholz said.
What does this mean for Ukraine?
The agreement was silent on additional funding for Ukraine. Merz said that he would try to convince Scholz to make available an extra €3 billion in aid by voting through a one-off extension of the regular budget. Scholz had previously blocked this plan over funding concerns. His spokesperson signalled on Wednesday, Scholz could be open to reconsider the Ukraine aid with new funding options on the table.
When will this happen?
The new parliament convenes by 23 March, so the two centrist parties have less than three weeks to push their proposals through. According to a provisional timeline, seen by Euractiv, the parliament’s directly elected chamber, the Bundestag, will come together in its old composition for a first reading of the proposals next Thursday.
The legislative process will then be wrapped up on Tuesday, 18 March. The parliament’s state chamber, the Bundesrat, could seal the deal on Friday, 21 March.
What majorities are needed?
The main proposals each require the support of a two-thirds majority in both the old Bundestag – 489 of 733 MPs – and in the Bundesrat, whose delegates are appointed by the regional governments. That is necessary both to change the constitution for the debt brake reform and to set up an exempted special fund.
The centre-right CDU/CSU bloc and the SPD can jointly muster 403 lawmakers in the Bundestag. So they need the support of 86 MPs from the liberal Free Democrats (FDP) or the Greens.
Will it pass?
The FDP is very unlikely to agree to a reform of debt rules that they vigorously defended against their partners in Germany’s previous coalition government.
This leaves the Greens. While they previously said they were open to reforming the debt brake with the old parliament, several Green MPs told Euractiv before yesterday’s announcement that they do not want to risk legal trouble for the sake of short-term solutions like special funds. The new proposal includes both commitments to reform and a special fund, which might be more in line with the Greens’ preferences. However, the party has not embraced the plans yet.
The Greens’ parliamentary leader, Katharina Dröge, said the party was open to talks but bemoaned that Merz was doing “exactly the opposite” of what he said during his election campaign, which prioritised budget cuts over new debt. Additional spending would have to address climate change and net-zero policies, she said.
There is also strong resistance to debts and deficits within Merz’s own party, which has a long-standing conservative fiscal tradition. The party’s youth wing publicly railed against the plans on Tuesday evening. Moreover, some CDU MPs are free from party constraints, as they won’t return under the new parliament. If the Greens are on board, however, an unusually large CDU rebellion would be needed to foil the plans.
Is this legal?
The parliament legally remains in session and capable of making decisions until a new parliament convenes within 30 days after an election. An outgoing parliament was used in 1998 to approve deploying German armed forces to Kosovo.
Opponents believe, however, that the new debts may unduly bind a new parliament. Another counterargument is that MPs are not given enough time to examine the proposals, which German courts have previously used to halt legislation. The Left party has already threatened to sue.
*Thomas Moller-Nielsen contributed reporting.
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