Germany Plans Debt Rule Changes to Boost Defense, Infrastructure

Germany’s potential coalition government announced plans to relax national debt restrictions, aiming to increase defense spending amid rising concerns over U.S. support for European allies.

Additionally, they proposed a €500 billion ($533 billion) fund to upgrade Germany’s infrastructure over the next decade. This initiative seeks to stabilize Europe’s largest economy, which has contracted for two consecutive years.

Defense Spending and NATO Commitments

Friedrich Merz, the center-right election winner, is working to form a coalition with the outgoing Chancellor Olaf Scholz’s center-left Social Democrats. Their plan includes exempting defense spending above 1% of GDP from debt limits.

Merz emphasized the urgency of strengthening Germany’s military, citing evolving security threats. He stressed Europe’s need to bolster defense capabilities while expressing hope that the United States remains committed to NATO obligations.

Merz indirectly referenced recent U.S. policy shifts on Ukraine, stating, "Whatever it takes must also apply to our defense." He has long supported trans-Atlantic cooperation but advocates for Europe’s gradual independence from U.S. reliance.

After Russia’s 2022 invasion of Ukraine, Scholz pledged to raise defense spending to 2% of GDP, creating a €100 billion military modernization fund. However, this fund will be depleted by 2027, necessitating new financial strategies.

Reforming Germany’s Debt Policy

Germany’s constitutional debt brake restricts new borrowing to 0.35% of GDP annually, with exceptions for emergencies. It was temporarily lifted during the COVID-19 crisis but reinstated.

The proposed defense and infrastructure spending plans require a two-thirds majority in parliament. This presents challenges, as the far-right Alternative for Germany (AfD) opposes increased borrowing, while the hard-left Left Party resists higher military expenditures.

Until the new parliament convenes in March, the current legislature will debate the proposals. Coalition partners may need backing from either the Green Party or the Free Democrats, who oppose excessive debt.

Lars Klingbeil, co-leader of the Social Democrats, stated that by 2025, the government intends to amend the debt brake policy to enable further investment. Merz added that the infrastructure package could stimulate large-scale private investment, further boosting Germany’s competitiveness.

While significant negotiations remain, this coalition remains the most viable path to forming Germany’s next government.