Parties negotiating the formation of a new German government have agreed to authorise €500 billion in new debt for infrastructure projects.
That was alongside a separate budget for military spending, bringing the total funding package to as much as €900 billion.
Many economic experts, though, were highly sceptical regarding the agreement.
Newspaper Die Welt claimed it was a break from Merz’s election campaign, saying it was “a return to the era of Angela Merkel”, the former CDU chancellor who many believed was the reason for Germany’s current troubles.
Before the snap elections on February 23, party leader Friedrich Merz and his Christian Democratic Union (CDU) colleagues promised not to let go of the German debt brake, the constitutionally mandated limit on creating new debt and would prioritise structural reform.
Despite that, on March 4, citing the international situation, new record debts and special funds to be financed by loans were approved.
To achieve this, the Constitution will have to be amended, likely in the week starting March 10.
Making matters more controversial is that the almost €1 trillion vote will involve the old, outgoing majority, which would bypass any possible block from the opposition.
On the evening of March 4, the CDU and Social Democratic Party (SDP), which are currently negotiating the formation of a new government, agreed to create a €500 billion special fund for the repair of German infrastructure, with a term of ten years. Of that, €100 billion was to be made available to the 16 Federal States.
The parties said they hoped the fund would also trigger large-scale private investment.
Additionally, the constitutional debt brake would be eased for defence investments that surpassed 1 per cent of German GDP.
Reacting to the agreement, defence Minister Boris Pistorius (SPD) appeared to be delighted. “This is a historic day, for the Bundeswehr and for Germany,” he told Der Spiegel on the evening of March 4.
“We are sending a strong signal to the people in our country and to our allies,” Pistorius said.
The SDP were seen as the big winners of the negotiations.
Germany’s outgoing Chancellor Olaf Scholz has called for reform of the country’s “debt brake” to strengthen the country’s defence capabilities. https://t.co/qYMpKo2GwI
— Brussels Signal (@brusselssignal) February 14, 2025
“The measures presented testify to decisiveness and enable the ability to act,” Schleswig-Holstein’s Prime Minister Daniel Günther (CDU) said in a statement from the State Chancellery.
“All levels of government are given room for manoeuvre for investments in order to make Germany ready for defence and to put the infrastructure in order.”
Economy professor Veronika Grimm, however, said the planned spending spree was “a path into the abyss”.
Speaking to news outlet Neue Osnabrücker Zeitung, she said it was “an extremely risky bet to postpone the need for reform further and further through debt”.
“The chances that this will go well are slim.”
Grimm said the budget needed fundamental restructuring for the army to be permanently financed from the core budget instead of what she called a debt-financed patchwork.
Spending huge amounts of money without a broader strategic vision would “create many problems”, Grimm said.
She added that it would not even lead to economic growth as most of the money would be spent on arms imports, boosting growth abroad, not in Germany.
This “sounds more like satire than a serious proposal”, Grimm said.
She further noted that the agreement came about under the outgoing parliament, while voters had explicitly given the opposition a blocking minority to such plans.
Economics professor Lars Feld said on X on March 4: “Today is the day from which the German debt brake is history. Germany is no longer a safe haven for bond investors.”
“I wish you all good luck with higher interest rates and inflation.”
In Frankfurter Allgemeine Zeitung, a CDU-friendly news outlet, it was highlighted that Merz “wanted to set the necessary course in economic policy before talking about a lack of money.”
“Now it’s the other way around.”
“The foreseeable black-red coalition is being built on debt. How many there will be is unclear but the additional loans they agreed on Shrove Tuesday can easily add up to a trillion euros in the end,” the outlet stated.
“With the gigantic additional debt, the pressure for reform is decreasing. Many voters may feel deceived by Friedrich Merz – and rightly so.”
COMMENT: Germany’s economic future hinges on infrastructure upgrades and overcoming its innovation-stifling corporatist culture, but even Merz’s proposed debt brake reforms may fall short of driving needed change, writes Karl Pfefferkorn. https://t.co/uVE2N6q6vR
— Brussels Signal (@brusselssignal) November 21, 2024
Left-wing party Die Linke had already announced that it did not want to support an armament plan for the Bundeswehr, the German armed forces.
It said it expected that the majority parties would seek an agreement with the party, as no one wanted to co-operate with the right-wing Alternative for Germany (AfD), which performed strongly in the latest election.
Die Linke said, if it deemed it necessary, it would go to the Federal Constitutional Court to try to block more spending for the army.
The party did support a reform of the debt brake, primarily in the hope that more money could then be spent on social causes and benefits, it said.
Ines Schwerdtner, leader of Die Linke, said the CDU and SPD had tried to “push through” their project with old majorities.
The Greens, also needed for the two-thirds majority, said they wanted concessions for their support. Green parliamentary group leader Katharina Dröge demanded more money for so-called climate protection.
On the Right, Merz was strongly criticised for a “betrayal” of his campaign promises.
“Almost €1 trillion of new debt at the expense of taxpayers, which he then calls ‘assets’: Merz lied to voters with every word he said during the election campaign,” claimed AfD President Alice Weidel on X on March 4.
“The AfD would cut costs – and only spend in the interests of our country and our citizens.”
In a joint statement with her co-party chairman Tino Chrupalla, she added that voters had been “clearly disregarded” as the agreement hinged on the “old Bundestag”.
The former governing coalition of the SPD, Greens and Free Democratic Party (FDP) collapsed last November over disagreements on increasing new debt for the Federal Republic.
Liberals consistently opposed any efforts to loosen the debt brake and resisted outgoing Chancellor Olaf Scholz’s call to approve an emergency resolution for its suspension. That led to the dismissal of Liberal finance minister Christian Lindner.
In the following elections, the CDU campaigned on sticking to the debt brake but Merz, as leading candidate, indicated that he would not stand in the way of reform.
FDP parliamentary group chairman Christian Dürr said the creation of all these new “infinite debts” was “irresponsible”.
The FDP further stressed that there were no concrete proposals on strengthening the army, only a call to allocate more funds.
In November 2023, the Constitutional Court ruled that the transfer of billions of euros in pandemic-related debt to a separate climate fund was illegal, drawing clear limits for the handling of special funds and the debt brake.
That meant such special funds should not be used as a strategy to circumvent the debt brake.
Germany’s Bundesbank proposed a reform of the country’s debt brake, allowing Berlin to borrow an additional €220 billion by 2030, a break from its traditional austere stance. https://t.co/WsZvcovqEt
— Brussels Signal (@brusselssignal) March 5, 2025
