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Friedrich Merz, Germany’s chancellor-in-waiting, has agreed a deal with his likely coalition partner to inject hundreds of billions in extra funding into the country’s military and infrastructure, marking a “sea-change” in the nation’s conservative approach to borrowing.
In an announcement that came just over a week after he won federal elections, Merz said his Christian Democratic Union (CDU), its Bavarian sister party and the rival Social Democrats (SPD) will jointly present a bill in parliament next week to relax the country’s debt brake.
A provision would exempt defence spending above 1 per cent of GDP from the debt brake rules, allowing Germany to boost spending on its armed forces by an unlimited amount at a time when Europe faces the prospect of losing US guarantees that have underpinned its security since Donald Trump began his second presidential term.
The future coalition partners will introduce another constitutional amendment to set up a €500bn fund for infrastructure, which would run over 10 years. They are also planning to loosen debt rules for states.
“I want to say that very clearly in view of the threats to our freedom and peace on our continent, our defence must now apply [the stance of]: ‘Whatever it takes’,” said Merz, standing alongside party leaders from the SPD and the Bavarian Christian Social Union at a press conference in Berlin on Tuesday.
He added: “The additional spending on defence can only be coped with if our economy returns to stable growth within a very short period of time . . . This requires rapid and sustainable investments in our infrastructure.”
The bills need a two-thirds majority in parliament to pass, which means Merz will have to reconvene the outgoing Bundestag that was elected in 2021 — and secure the backing of the Greens.
The plan marks a stunning shift in Germany’s traditionally conservative approach to public borrowing. Berlin in 2009 enshrined the debt brake in its constitution, which limits government borrowing and keeps the structural deficit at 0.35 per cent of GDP.
Economists and defence specialists welcomed the decisive step.
“This is a fiscal sea-change for Germany,” said Holger Schmieding, chief economist at Berenberg. “Merz and his coalition-to-be are rising to the occasion.”
Jana Puglierin, a senior policy fellow at the European Council on Foreign Relations, said Merz had “recognised how extraordinary the situation is”.
She added: “He has stepped up the pace, shown enough flexibility to allow the SPD to come on board and laid the foundations for a coalition capable of taking action.”
Jens Südekum, a professor of international economics at Düsseldorf’s Heinrich Heine University who had urged Merz to reform the debt brake, described the announcement as “a total game-changer”.
Merz, whose conservative CDU/CSU had campaigned on a stance of opposing debt brake reforms in the lead-up to the February 23 election, has accelerated coalition talks with the SPD since Trump publicly admonished Ukraine President Volodymyr Zelenskyy at the White House last week.
The preliminary deal paves the way for a broader coalition agreement with the SPD. Germany’s next chancellor wants to use the outgoing parliament’s supermajority to pass the constitutional amendments because his government would probably be blocked in the next parliament by the far-right Alternative for Germany and far-left Die Linke.
The current parliament can be convened until March 25, before new MPs can take their seats.
The deal with the SPD came as the European Commission outlined on Tuesday a joint debt instrument that would enable member states to fund the purchase of military equipment.
