Germany's landmark spending package secures parliamentary approval

By Arne Delfs, Michael Nienaber and Kamil Kowalcze

 

German lawmakers passed a landmark spending package, taking a major step toward unlocking hundreds of billions of euros in debt financing for defense and infrastructure and heralding the end of decades of budget austerity. 

 

The controversial legislation — pushed by conservative Chancellor-in-waiting Friedrich Merz — was approved Tuesday in the lower house of parliament with 512 votes out of a total of 733, comfortably clearing the two-thirds threshold required for changes to the country’s constitutional borrowing rules.

 

The bill, also backed by the Social Democrats and the Greens, would largely release defense spending from the so-called debt brake, creating a potentially unlimited supply of money to rearm to deter Russia. It would also set up a €500 billion ($546 billion) fund to invest in the country’s aging infrastructure.

 

 

“This is possibly the biggest spending package in the history of our country,” Lars Klingbeil, the co-leader of the Social Democrats and a likely cabinet member in the next governing coalition, said during the debate in Berlin. “Germany must take on its leadership role in Europe.” 

 

Germany’s shift to an expansive fiscal policy promises to revive Europe’s largest economy after two years of contraction due to structural problems including high energy costs, sluggish manufacturing and an overbearing bureaucracy. The historic decision — expected to also help bolster growth across the region — was spurred by Donald Trump’s shift away from the transatlantic alliance. 

 

While German politicians now bear “an enormous responsibility,” the huge borrowing authorisations approved Tuesday can help spur growth and boost competitiveness, Peter Adrian, president of Germany’s DIHK industry lobby, said in an emailed statement.

 

“The billions must be used wisely and efficiently,” he said. “If this doesn’t happen, this massive debt could become an enormous risk.”

 

Germany’s benchmark DAX index was little changed on the news after touching a record earlier. The country’s bonds erased an earlier decline after the news. The euro slipped. Both German yields and the currency have risen significantly this month in anticipation of the spending boost. 

 

Following the lower house’s approval, the legislation will head to a vote on Friday at the Bundesrat, where Germany’s 16 federal states are represented. If approved there — which is seen as likely after local governments were promised billions of euros — it would then be signed into law by President Frank-Walter Steinmeier. 

 

Timing is tight, because conservative leader Merz sought to push through the measure before the new parliament is seated next week. Constitutional changes would then become more difficult after the far-right Alternative for Germany, or AfD, and the anti-capitalist Left increased their support in the Feb. 23 election. Both parties have opposed the spending plan and have gained in recent polls. 

 

Highlights of Germany’s Spending Package

 

• Defense spending in excess of 1 per cent of gross domestic product — roughly €45 billion — will be released from constitutional borrowing restrictions
• Special, off-budget infrastructure fund will be empowered to borrow as much as €500 billion over 12 years
• Of that amount €100 billion will be transferred to the Climate and Transition Fund and states will receive €100 billion for regional projects
• Germany’s 16 states will have leeway to borrow as much as 0.35 per cent of GDP, or the equivalent of around €16 billion, instead of required to run balanced budgets 

For Merz, the passage is a milestone, even if his credibility was attacked after campaigning on budget consolidation. The financing plan will facilitate talks to form a ruling coalition with outgoing Chancellor Olaf Scholz’s Social Democrats, which slumped to third in last month’s national ballot. Merz’s goal is to have a government in place by mid-April.

 

After early fumbles, Merz’s Christian Democrat-led bloc and the SPD on Friday secured backing for their spending bill from the Greens, which had rejected the initial proposal. They promised changes including more money to fight climate change and ensuring that the resources would be used only for new projects. 

 

During the debate in the Bundestag, all three centrist parties rallied together in a marked contrast to the divisive battles over migration. In late January, Merz deepened riffs with the SPD and the Greens with a failed effort to force through a crackdown on illegal entries with the support of the AfD. 

 

“We ended the legislative period with a bang,” Robert Habeck, the outgoing vice chancellor from the Greens, said after the vote. “Climate protection in Germany can no longer fail because of money; it can only fail because of a lack of competence or a lack of will.”

 

What Bloomberg Economics Says: 

“Reasonable assumptions for how spending may ramp up suggest growth could come in at 1.6 per cent in 2026 (calendar-adjusted), twice the rate of our previous forecast.” 

 

— Martin Ademmer and Jamie Rush  

Emphasizing solidarity, the 69-year-old Merz said Germany’s move to unlock billions of euros in military spending should be seen as a “first great step” toward the creation of a broad European defense community including non-EU nations like the UK and Norway. 

 

With outgoing Scholz watching from the government benches, Merz spoke of Germany’s need to rebuild its defense capabilities after years of neglect and “a false sense of security” and called for awarding contracts to European manufacturers.

 

Defense contractors ranging from Thyssenkrupp AG to BAE Systems Plc and smaller drone makers stand to gain the most from Germany’s defense-spending spree, Bloomberg reported on Monday.

 

“Our allies in the European Union and Nato are looking to us today, just as our adversaries and the enemies of our democratic and rules-based order are,” Merz said.