German parties strike deal on debt brake to lift defence, infrastructure
By Frank Prenesti
Date: Wednesday 05 Mar 2025
(Sharecast News) - Germany's likely ruling coalition partners have agreed a deal to spend billions on defence and infrastructure as part of a major reform to spending rules.
Friedrich Merz, leader of the conservative CDU/CSU alliance which won the largest share of the vote at the recent federal election, said his group and the Social Democrats (SPD) would present a bill in parliament next week to loosen the so-called debt brake which limits spending as a proportion of GDP.
The news saw German shares and borrowing costs surge in response, with the country's main DAX index up almost 3% and a sharp jump in the 10-year government bond yield.
The move is a response to US President Donald Trump's pivot towards Moscow over the war on Ukraine - arms shipments to Kyiv were suspended on Tuesday - and ultimatums that Europe should raise defence spending.
Under the German proposal, defence spending above 1% of GDP would be exempt from the debt brake rules - which limit new borrowing to 0.35% - effectively writing a blank cheque on weapons purchases. The restrictions were enshrined in law after the global banking industry caused the financial crash of 2008.
The future coalition partners also proposed 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 bringing them to the federal level.
'WHATEVER IT TAKES'
"In view of the threats to our freedom and peace, the following must now also apply to our defense: 'Whatever it takes'," Merz told reporters said alongside the CSU and SPD leaders.
"Europe must now grow up and Europe must be able to defend itself, and we want to rapidly make progress on this path, step by step. 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 existing Bundestag which is legally still in session until later this month and also win crucial support from the Green Party. It also excludes the participation of the far-right Alternative for Germany party, which came second in the election.
Berenberg economist Holger Schmieding called the deal "a really big bazooka" adding that the "fiscal sea change for Germany" would likely pass in parliament.
"Friedrich Merz and the parties that look set to form his coalition are rising to the challenges which Germany is facing in times of almost unprecedented geopolitical upheaval for Europe," he said.
"The extra room for defence spending sends a clear signal to Vladimir Putin and Donald Trump as well as to Germany's European friends that Germany is serious about defending itself and helping Ukraine. "
"Germany is finally taking on the leadership role which, given its size and its fiscal space, it should have assumed years ago. For Merz, whose CDU/CSU had campaigned on a "we want to preserve the current debt brake" platform, this is a remarkable turnaround. Merz seems to be a very fast learner, which is not a bad quality for a leader."
"At home, the infrastructure fund signals that the new government will seriously tackle key domestic deficiencies. I look forward to the day in the - probably still somewhat distant - future when German trains may run as fast and punctual as those in France, Switzerland or Austria."
Reporting by Frank Prenesti for Sharecast.com
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