Germany’s Merz says the CDU/CSU and SPD will submit a motion to the Bundestag lower house of parliament next week.
The parties hoping to form Germany’s next government have agreed to create a 500-billion-euro ($536.9bn) infrastructure fund and overhaul borrowing rules, a tectonic spending shift in Europe’s largest economy.
Friedrich Merz’s conservatives and the Social Democrats (SPD), who are in negotiations to form a coalition after a national election last month, will put their proposals to the outgoing German parliament next week.
Merz, Germany’s likely next chancellor, has seized the moment after the return of Donald Trump to the White House threw the transatlantic alliance into turmoil, and has underlined the urgency for Europe to strengthen its own defences.
Trump froze military aid to Ukraine after a bitter clash last week with its president, Volodymyr Zelenskyy, reinforcing fears that the US could strike a deal with Russia to end the war in Ukraine while disengaging from Europe.
Economists and investors have long urged Germany to reform its constitutionally enshrined state borrowing limits – known as the “debt brake” – in order to free up investment and support an economy that has contracted for the past two years.
The reform would mark a rollback of borrowing rules imposed after the 2008 global financial crisis that many now say are outdated and keep Germany in a fiscal straitjacket.
Amending constitution
Merz said the CDU/CSU and SPD would submit a motion to the Bundestag lower house of parliament next week to amend the constitution so defence expenditure above 1 percent of economic output is exempt from the debt brake.
He pledged to do “whatever it takes” when it comes to defence “in light of threats to our freedom and peace on our continent”.
A commission of experts will separately develop a proposal for modernising the debt brake to boost investments on a permanent basis.
According to a poll by INSA, 49 percent of Germans support loosening the debt brake while only 28 percent are against it. But changing the debt rules and creating a special fund both require a two-thirds majority in parliament.
The conservatives and SPD are rushing to get the moves passed in the outgoing parliament, given far-right and far-left parties will have a blocking minority in the next parliament after scoring strongly in last month’s election.
The Left party has threatened a legal challenge if Germany takes on new debt to fund defence expenditure.
The Greens party, whose support is needed to get the debt brake reform across the line, said it would examine the proposals, but made no firm commitment.
While markets rallied after the announcement, sceptical voices also emerged.
Kyrill-Alexander Schwarz, a constitutional lawyer at the University of Wuerzburg, said it was “extremely problematic” for an outgoing parliament to make such big binding decisions.
German newspapers said Merz was breaking a campaign promise of fiscal rectitude just 10 days after the election.
“Mr Merz, that is voter deception!” warned top-selling paper Bild. “Merz carried out a 180 U-turn in record time,” wrote Handelsblatt.
Left-leaning papers were more indulgent. “Good that Merz breaks his campaign promise,” wrote the Sueddeutsche Zeitung.
Friedrich Heinemann from the ZEW economic research institute said Germany’s debt-to-GDP ratio could exceed 100 percent by 2034. It is now about 64 percent, far below other major industrialised countries such as the US, France or Japan.
The US has repeatedly pressured Germany to increase its defence spending to overhaul a military that has felt neglected since the end of the Cold War and has diverted weapons to support Ukraine in the war against Russia.