Locations Affected: Germany
The German Chancellor-in-waiting, Friedrich Merz, has announced plans for an economic overhaul, including a revision of borrowing limits and the creation of a USD 536 billion infrastructure fund to strengthen the military and revive the weakening economy. The announcement comes just over a week after Merz’s party, the Christian Democratic Union (CDU), along with its ally, the Christian Social Union (CSU), won the most seats in the national elections. The CDU/CSU and the Social Democrats (SPD), currently negotiating to form a coalition government, are expected to propose the bill to the German parliament in the coming week.
Reason for the Proposal
The proposed plan comes amid growing transatlantic tensions fueled by US President Donald Trump’s policies and statements, as well as heightened risks from Russia—signaling a need for Europe to strengthen its defense and independence. Additionally, Germany’s economy has slowed over the past two years. The country’s debt-to-GDP ratio is currently around 64 percent significantly lower than that of other major industrial nations like the US, France, or Japan.
Proposed Plan and Opposition
- The reform would roll back borrowing rules, including the debt brake imposed after the 2008 global financial crisis. The bill proposes amending the constitution to exempt defense spending exceeding 1 percent of economic output from borrowing limits and to allow federal states to incur debt up to 0.35 percent of their economic output.
- A commission of experts will also draft a separate proposal to modernize the debt brake and boost investments.
- The CDU/CSU and SPD plan to pass the bill in the outgoing parliament to ensure it secures a two-thirds majority. However, it may face resistance in the new parliament, where parties opposing the changes, such as Alternative for Germany (AfD) and The Left, hold a blocking minority.
- The Left party has threatened a legal challenge if new debt is used to fund military expenses. Meanwhile, the Greens, whose support would be crucial for passing the bill, have not yet made a commitment.
Outlook on the Situation
The current borrowing limits have been criticized as outdated, with many economists advocating for looser rules to stimulate economic growth. If the plan succeeds, Germany’s economy could see rapid expansion. However, a careful balance will be needed to ensure that increased military spending does not overburden the economy. Additionally, rising debt levels could increase interest costs and limit future policy flexibility.
On the international front, this shift in economic and defense policy could signal a stronger, more independent European defense posture. However, it may also lead to debates over burden-sharing within NATO and the European Union, particularly regarding Germany’s evolving role in regional security.
