Germany's proposed defence and infrastructure bonanza: how and why?

Germany's proposed defence and infrastructure bonanza: how and why?
by AFP Staff Writers
Frankfurt, Germany (AFP) Mar 5, 2025

Germany's likely next chancellor Friedrich Merz announced plans on Tuesday to spend hundreds of billions on Germany's infrastructure and defence, as well as to reform the country's "debt brake".

Introduced in 2009 after the financial crash, the brake limits government borrowing to 0.35 percent of GDP in an effort to make sure the German government can always pay its bills.

But critics say the brake holds back sorely needed investment.

The scale of Merz's proposals has boosted hopes that Germany could stimulate its economy, currently facing its third year of low or no growth, as well as refurbish its threadbare armed forces, gradually rundown since the end of the Cold War.

Here are the key details of the proposals:

What exactly is proposed?

Under the plans, only defence spending equivalent to about one percent of German GDP -- about 45 billion euros ($48.2 billion) -- would count towards the debt brake.

Spending above that amount would not count towards it, allowing for potentially unlimited borrowing to spend on defence.

In addition, a 500 billion euro special fund for infrastructure would also be set up, funded by borrowing that also would not count towards the debt brake.

Germany's federal states, which are currently forbidden from running deficits, would also be able to take out debts equivalent to 0.35 percent of GDP each year.

What needs to happen for the proposals to pass?

The centre-right CDU/CSU alliance and the centre-left Social Democrats (SPD), the two largest parties in the outgoing Bundestag, are likely to support the proposals. Merz is the leader of the CDU, and the SPD have long wanted a loosening of the brake.

But since it is enshrined in the constitution, they would need the support of the Greens or the liberal Free Democrats (FDP) to achieve the necessary two-thirds majority.

The hard-right Alternative for Germany (AfD) and hard-left Linke oppose reforming the brake as Merz has suggested, the former since they believe the state should not spend more than it takes in and the latter since they oppose higher defence spending.

The reforms would need to pass by the end of March, since Germany's newly elected Bundestag will then take up its work. The AfD and Linke, who both made gains in February's general election, could then block the measures.

What would the money be spent on?

After years of relative financial restraint -- not since 1990 has Germany met the NATO guidelines of spending 2 percent of GDP on defence -- observers agree that the military needs wide-ranging investment in order to be battle-ready.

A parliamentary report on the armed forces issued last year said they suffered from "a shortage of materiel, from major equipment to spare parts" as well as "disastrous" infrastructure, including barracks in a "disgraceful" condition.

As for the infrastructure fund, it is hoped it will help boost growth and thus, in the long-run, help pay down any additional debt.

The SPD, currently in negotiations with the CDU to form a coalition government, also want to spend more to improve infrastructure that has suffered high-profile failures in recent years, including a bridge that partially collapsed in Dresden last September.

What has the reaction been?

Investors' reaction was positive, with Germany's blue-chip DAX index rising 3.6 percent on Wednesday morning, led above all by defence firms.

Kathleen Brooks, research director at brokerage XTB, pointed out that the MDAX index of smaller companies that are more tied to German economy also rose strongly, suggesting markets expect the plans to boost Germany's economy.

"This is huge. For years, economists have said that Germany needed to change its spending rules to get out of the economic hole. It's taken a Conservative Chancellor-in-waiting to pull the trigger," she said.

But not all economists see it that way. Veronika Grimm, who advises the German government on economic policy, told news portal RND that deregulation and tax cuts -- not government spending -- would fix the German economy.

Germany wants long-term defence exemption in EU spending rules
Brussels, Belgium (AFP) Mar 5, 2025 - Germany has called for an overhaul of strict EU spending rules to allow countries to invest more in defence over the long term, European diplomats told AFP on Wednesday.

It comes after Germany's likely next chancellor, Friedrich Merz, this week vowed billions of euros in extra spending on defence and infrastructure.

Germany's EU ambassador surprised his European counterparts during a Brussels meeting when he suggested giving member states more room to spend, beyond a four-year exemption proposed this week, several diplomats said.

The proposal marks a significant shift for a country that has, in the past, maintained a hardline stance on budgets and sought to avoid any loosening of spending rules.

With US President Donald Trump's pivot away from backing Ukraine casting doubt on future support for Europe as well, the bloc is planning a radical ramping up of defence investments to better protect itself.

EU leaders are set to approve the four-year exemption to allow member states to surge defence spending during an extraordinary summit in Brussels on Thursday.

But the German ambassador suggested that Brussels should be "going further", given the current geopolitical situation, one EU diplomat said.

However the ambassador's call that was not welcomed by other states with a frugal approach to spending.

"The Dutch and Swedes asked not to change the text," the diplomat added.

EU members are bound by spending rules demanding they keep the public deficit below three percent of economic output and debt at a maximum 60 percent of GDP.

The subject of changing the rules outright could be discussed during Thursday's summit, at which leaders are expected to endorse a plan by EU chief Ursula von der Leyen to spur defence investments and support Ukraine against Russia.

EU powerhouse Germany is set to pour billions more into defence after Merz said Tuesday that his centre-right CDU/CSU and the centre-left Social Democrats would propose to exempt more of the spending from the country's constitutionally enshrined "debt brake".

Ramping up defence expenditure, as the bloc is advocating, could make it difficult for member states to stay within the debt and deficit limits.

After long and painful negotiations to agree on a reform of the EU's spending rules, the bloc struck a deal last year -- before Trump's election victory in November.