German Parties Agree to Lift Debt Brake for $535 Billion Defense Fund

The debt brake was written into Germany’s constitution by Angela Merkel after the 2008 financial crisis.

A soldier fires a machine gun from a Leopard 2 tank at the Bundeswehr tank battalion 203 at the Field Marshal Rommel Barracks in Augustdorf, Germany, on Feb. 1, 2023. Martin Meissner/AP Photo

Friedrich Merz, who is likely to be the next chancellor of Germany, has said he has hammered out a deal with the Social Democrats (SPD) to remove the country’s debt brake in order to allow higher defense spending, and to create a 500 billion euro (about $535 billion) infrastructure fund.

Merz’s Christian Democrats (CDU) and their Bavarian allies, the Christian Social Union (CSU), say they have reached a deal with the SPD of outgoing Chancellor Olaf Scholz, and will table it next week in the German parliament.

The announcement comes as European countries scramble to boost their defense spending following indications from the United States that it intends to reduce its role in protecting Europe from a Russian threat.

On March 4, European Commission President Ursula von der Leyen unveiled a ReArm Europe plan to be presented to the leaders of the 27 members of the European Union at a summit on March 6.

She said it could generate up to 800 billion euros (about $856 billion) in extra defense spending.

Von der Leyen’s five-point plan includes relaxing the EU’s fiscal rules on debt for member states.

The deal between the CDU–CSU alliance and the SPD includes loosening Germany’s own debt brake, to allow the country to borrow more for defense spending.

Economy Needs to Grow Quickly

Merz posted on social media platform X on March 4: “The additional defense spending is only sustainable if our economy grows quickly. This requires better competitive conditions and massive investments in infrastructure. That is why we want to set up a credit-financed special fund of 500 billion euros [about $535 billion] over ten years. A proposal to amend the constitution is to be launched next week.”

In a separate statement, Merz said, “We are aware of the scale of the tasks ahead of us, and we want to take the first necessary steps and decisions.”

President Donald Trump has said he wants NATO members, including Germany, to increase their defense spending to 5 percent of gross domestic product (GDP), and although there has been a sharp uptick in spending since Russia invaded Ukraine in February 2022, some countries have not reached even the 2 percent target that NATO set in 2014.

On Feb. 25, British Prime Minister Keir Starmer announced that the UK would increase defense spending to 2.5 percent of GDP by 2027, and to 3 percent after the next general election, which is due in 2028.

After a very public clash with Ukrainian President Volodymyr Zelenskyy in the Oval Office on Feb. 28, Trump announced this week a freeze on military aid to Ukraine.

Trump is putting pressure on Zelenskyy to agree to a peace deal with Russian President Vladimir Putin, and is threatening to withdraw U.S. military support permanently unless he agrees to compromise.

Several European countries, including the UK, France, and Germany, are backing Zelenskyy but acknowledge that they will need to ramp up their defense spending if they are to cover the gap that the United States could leave if it disengages.

The CDU–CSU bloc won Germany’s election in February but gained only 28.5 percent of the vote, meaning that Merz will have to find several coalition partners in order to rule as chancellor.

Merz has ruled out forming a coalition with the anti-immigrant Alternative for Germany (AfD) party, which came in second with 20.8 percent and is likely to cobble together a coalition with the SPD, which got 16.4 percent of the vote, and possibly the Green Party, which won 11.6 percent.

‘Threats to Our Freedom’

On March 4, Merz said: “In view of the threats to our freedom and peace on our continent, whatever it takes must now also apply to our defense.

“We are counting on the United States of America to continue to stand by our mutual alliance obligations in the future. But we also know that the resources for our national and alliance defence must now be significantly expanded.”

Germany has state borrowing limits, known as the schuldenbremse (debt brake), which were imposed after the 2008 global financial crisis. However, they have been criticized by some economists as putting Germany in a fiscal straitjacket, and during the recent election campaign there was much debate about removing them.

The debt brake—which restricts Germany’s structural budget deficit to 0.35 percent of GDP in normal times—was written into the country’s constitution on the insistence of then-Chancellor Angela Merkel in 2009.

Sebastian Dullien, research director at the Dusseldorf-based Macroeconomic Policy Institute, said: “The result of the discussions on the special infrastructure fund and the reform of the debt brake is a real game-changer.

“If they succeed, the German economy’s stagnation could soon be over. Not just because urgently needed investments will come, but also because the mood should shift dramatically.”

Reuters contributed to this report.