Germany passes historic spending reforms

Germany’s outgoing parliament on Tuesday approved a sweeping increase in government borrowing, passing legislation that includes significant changes to the country’s strict debt rules. The move is aimed at bolstering defense capabilities and reviving economic growth in Europe’s largest economy.

The legislation, proposed by Chancellor-in-waiting Friedrich Merz’s conservatives and the center-left Social Democrats (SPD), outlines the creation of a €500 billion ($546 billion) fund dedicated to infrastructure development and economic recovery. It also includes changes to borrowing rules to support defense spending and aid for Ukraine.

To secure the necessary two-thirds majority, the coalition partners integrated last-minute demands from the Greens party, a key player in ongoing government formation talks following last month’s election. The legislation will now proceed to the Bundesrat, Germany’s upper house representing the country’s 16 states, which is expected to vote on Friday. Senior officials from the conservatives and the SPD have expressed confidence that the bill will pass.

According to Merz, leader of the center-right Christian Democratic Union (CDU), the exceptional borrowing is justified under the unique circumstances created by what he called “Vladimir Putin’s war of aggression against Europe.” Under the proposed package, defense spending exceeding one percent of GDP will be exempted from the constitutional debt brake, a move aimed at strengthening Germany’s military capabilities. Additionally, aid for Ukraine will fall under this exemption, potentially unlocking billions of euros for the embattled country.

“The decision we are taking today can therefore be nothing less than the first major step towards a new European defense community,” Merz stated. He emphasized the importance of involving non-EU countries such as the UK and Norway, while also advocating for European manufacturers to receive reliable and predictable defense orders.

Beyond defense, the package dedicates €500 billion to boosting Germany’s economy, with 20% of that amount committed to combating climate change — a critical demand of the Greens party. Furthermore, borrowing restrictions for Germany’s 16 states are to be relaxed, enabling billions more to be directed toward local infrastructure projects.
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The adoption of this ambitious package marks a significant victory for the incoming coalition and is expected to provide financial stability over the coming years. Its success comes after the collapse of the previous SPD-led coalition government in November, partly due to fiscal challenges.
The Bundesrat’s vote on Friday will be the final hurdle for the transformative package, which promises to reshape Germany’s economic and defense landscape for years to come.