Impropriety on loan. Germany releases the debt brake

The amendment of the RFN's Basic Act to increase defence spending and infrastructure investments should be considered as a key component of the changes initiated in this country following Russia's 2022 aggression against Ukraine, and as specified – delayed by 3 years. The outbreak of a full-scale war proved seemingly to be an insufficient catalyst for reforms in Germany, and only increasing uncertainty about the consequences of the fresh US president Donald Trump's policy forced Berlin to take action. The decision to circumvent the budgetary brake limits prejudges the formation of the CDU/CSU-SPD government but does not warrant the success of the state reform. Undoubtedly, however, politicians of the future coalition have created the chance to finance their intentions, which had previously been lacking.

The investment package adopted and the planned increase in defence spending are intended to stimulate the stagnation of the economy, aid modernise the broadly understood infrastructure – from railway to power and fibre networks, to equip and improve the Bundeswehr, but besides to address various social and political conflicts in the West Germany. The impact of the infrastructure fund on economical growth can be hampered by labour shortages and excessive bureaucracy, including at local level. akin restrictions – the deficiency of military service or the overregulation of procurement procedures for the army – may make it hard to strengthen the German armed forces.

If the reforms announced are successful, then regaining a strong economical position and raising military spending Germany will usage it to improve its negotiating position, especially in talks with US and European partners. This can aid the West Germany to fulfil its ambition to regain EU leadership.

On 18 March ending the word of office of the Bundestag adopted an amendment to the Basic Act, amending the debt rules on defence expenditure and infrastructure investments. The CDU/CSU, SPD and the Greens voted 512 out of 733 deputies. There were 206 MPs from AfD, FDP, BSW and Left. On March 21, the amendment was approved by the Bundesrat, in which it spoke 53 With 69 votes. The amendment of the Basic Act requires a majority of two-thirds of the vote in both the Bundestag and the Bundesrat. In the fresh parliamentary term, the adoption of the amendment would require an agreement with the AfD or the Left. Both parties are against it and will most likely challenge its admission to the national Constitutional Court: AfD opposes debt for investment and Left – for defence purposes. Negotiations with these groups – especially with AfD – are unacceptable for the remaining factions, and the CDU has even entered a formal ban on cooperation with both parties in the statutes. Therefore, from the position of the CDU/CSU and the SPD, the parties that would make a fresh coalition, it was essential to adopt an amendment by the erstwhile Bundestag line-up – on an extraordinary basis – after the elections, but before the constitution of the fresh parliament. Negotiations with the Greens were needed to get 2 thirds of the vote.

The amendment consists of 3 elements. First, it excludes the financing of expenditure on defence> 1% of GDP from the alleged debt brake operating area. This is simply a German regulation introduced into the Constitution during the 2009 global financial crisis to guarantee the financial stableness of the state^[1]. The additional debt measures are to be earmarked, inter alia, for the modernisation of the Bundeswehr, civilian defence, strengthening of intelligence services and support for the "states attacked" not in accordance with global law’ (e.g. Ukraine).

Secondly, it allows the national states to debt up to 0.35% of GDP^[2]. According to the debt brake, the yearly structural deficit of the West Germany since 2016 could not exceed the threshold of 0.35% of GDP, and since 2020 the Lands have been subject to a complete ban on fresh net debts. The pandemic, the war in Ukraine and the protracted economical stagnation revived the debate on the legitimacy of this restriction, and disagreements in this substance led to the dissolution of the coalitions of the SPD, the Greens and the FDP.

The 3rd component of the amendment is the creation of a 12-year out-of-budget fund worth EUR 500 billion to finance additional investment in infrastructure and climate (provided that at least 10% of the basic budget will mark investment) – of which 100 billion for the Lands and straight for climate policy.

Success of the future coalition

The adoption of the amendment is simply a success of CDU/CSU and SPD, crucial for the formation of the coalition under Friedrich Merz. At the same time, it eliminates 1 of the most crucial points in German politics – the way in which spending on infrastructure investments was financed, and the defence and military aid to Ukraine, which contributed to continuous crises in the erstwhile government. Future coalitions have besides been given the chance to spend any of the money from the regular budget to fulfil their electoral promises and avoid far-reaching savings.

Thanks to the amendment, each organization implements any of its political demands. For the chapedia, it was crucial to get additional, unlimited fiscal backing from the Bundeswehr. The aim is not only to improve the widely understood safety of the West Germany, but besides to strengthen the negotiating position (by expanding the defence budget) of future Chancellor Merza in talks with president Trump and partners in Europe. The Socialists and the Greens insisted on reforming the debt brake in order to get additional funds for investment and grow the budgetary space for social expenditure. In addition, the Greens, despite mediocre results in the Bundestag elections and the transition to opposition, were given the chance to proceed the climate projects launched in the erstwhile word and guaranteed backing for further. In addition, it was crucial for all parties to have force from the Länder, which endure from a chronic deficiency of investment resources with a increasing number of tasks (e.g. from migration policy). The anticipation of borrowing fresh loans will aid alleviate these shortages.

Most Germans support above average debt, especially for safety purposes. 64% of those asked consider the adoption of the amendment for the right decision– including more than 80% of CDU/CSU, SPD and Green supporters (Politbarometer survey for ZDF tv dated March 20). The extra-budget investment fund is little enthusiastic. Although half of the respondents are positive, 27% believe the amount allocated is besides high, and 15% mostly rejects the anticipation of debt for investments. This group is dominated by the sympathizers of chades – as many as 44% of them feel cheated by their own leader. This is translated into polling. The CDU/CSU has been in decline since its election, and has consistently benefited from the AfD, which overtakes the chadetia (CDU/CSU – 24%, AfD – 25%, Ipsos centre survey dated 9 April). Merz throughout the run argued that Improving the Bundeswehr and repairing the infrastructure are possible without fresh debts - it is adequate to reduce social spending and reduce migration policy costs. After the election, he abruptly changed his mind, indicating as an adverse origin for Germany a turn in US politics under president Trump. De facto, however, Merz has been aware for a long time that plans to modernise the West Germany, including strengthening defence and generating fresh impulses for the economy, cannot be realised from the current budget.

No more Bundeswehr problems? Yeah, but...

The simplification of debt limits for defence spending solves the problem of unchangeable financing of the increasing needs of the Bundeswehr, peculiarly crucial to meet the obligations of the RFN to implement the fresh NATO Force Model^[3]. The establishment of a peculiar fund for the German army in February 2022 of EUR 100 billion, which will be exhausted by 2027, allowed defence spending to increase from 52.4 billion to 90.6 billion ($95.91 billion) in 2024.^[4] Thus, for the first time since 1990, the West Germany has exceeded 2% of GDP (2.1%) of its defence spending, due to the cumulative budget of the Ministry of Defence (52 billion EUR), peculiar fund funds (19.8 billion EUR), military aid money for Ukraine (7.5 billion EUR) and another expenditure qualified as defence expenditure by Germany (11.4 billion EUR)^[5].

Additional defence measures are intended to bring the German safety strategy into line with current challenges: Russia's aggressive policy and the hazard of reducing US military engagement in Europe. Firstly, additional funds will meet the current needs of the army: replenishment of ammunition supplies, filling gaps after equipment transferred to Ukraine, full weapons units and strengthening the air defence of the RFN^[6]. Additionally, the CDU/CSU and SPD plans include modernization and equipping the Bundeswehr with the latest technologies: the expansion of cyber forces, communication systems and investments in artificial intelligence and unmanned systems. According to the preliminary estimates, financing of projects from this area alone would cost EUR 150 billion^[7].

Secondly, the national government will be able to allocate more crucial resources to rise the army's numbers – according to the Ministry of Defence's plans in 2031 it would increase from 183 1000 to 203 1000 soldiers. However, it will be essential to allocate funds for salaries for fresh military and civilian workers and to prepare appropriate infrastructure^[8].

Thirdly, the amendment of the Basic Law of the West Germany gives the authorities the means to implement the ‘operation plan Germany’ (Operationsplan Deutschland). In the event of Russian aggression against NATO, German task will provide, among another things, an efficient strategy for the transport of allied troops^[9].

Fourthly, Berlin will be given financial freedom to increase military aid to Ukraine, crucial due to the uncertainty about further support from the US. At the turn of 2024 and 2025, the Chancellor's Office long blocked the transfer of an additional EUR 3 billion to Kiev, arguing with the request to make cuts in another areas. Finally, in March this year, the Bundestag budget committee at the request of the Ministry of Finance approved the release of this amount.

The effective usage of fresh funds for the Bundeswehr will not be possible without the completion of the improvement of the procurement strategy launched by Defence Minister Boris Pistorius (SPD). Another challenge is the production capacity of the German arms industry. present it accounts for 0.3% of German GDP^[10], and on the list of world's largest arms producers, the first company with exclusively German capital is occupying 23rd-place Rheinmetall with turnover of $5.5 billion^[11]. Currently, companies, specified as the maker of Hensoldt navigation systems or RENK track vehicle gearboxes, have discussions on the employment of workers from civilian facilities intended to release personnel. another actors consider following the example of the KNDS consortium, which took over Alstom's French train maker mill in Görlitz in February of this year and plans to produce parts for Leopard tanks there.

A problem for the government of Germany remains the shortage of personnel in the army. As of 2020, the number of professional and contract soldiers has been decreasing (see Figure 1). 1 of the methods of filling this gap would be proposed by the Chadedia to reconstruct compulsory military or civilian service. This solution is consistently opposed to the SPD, which wants the military service to stay voluntary^[12]. However, the key to tackling this challenge will be to decision distant from the alleged military culture of restraint, developed in peculiar after the end of the Cold War with respect to military abroad operations and linked to anti-military sentiments of the local society. This approach was changed by events specified as Russia's seizure of Crimea and the beginning of its aggression in Donbasa (see Figure 2).^[13].

Public opinion polls indicate that 73% of Germans fear for safety in Europe, 65% fear that Russia will attack another European countries^[14], 27% advocate the restoration of compulsory military service, and 45% support the introduction of it in the military or in a social organization regardless of sex (see Figure 3). The decision to improvement the debt brake, alternatively than establishing a fresh peculiar fund, is intended to defend investments from possible political crises or to be taken over by parties reluctant to make specified a extremist change – any modifications would require the re-collection of 2 thirds of the Bundestag and Bundesrat votes. However, this does not find whether subsequent German governments will usage the financial space created by CDU/CSU, SPD and the Greens.

Figure 1. Structure of the Bundeswehr 2000–2024

Source: Anzahl der Soldaten und Soldatinnen bei der Bundeswehr von 2000 bis 2024, Statista, 26.02.2025, de.statista.com.

Figure 2. The attitude of Germans to increase defence spending and to the Bundeswehr

Source: T. Graf, Zwischen Kriegsangst und Kriegstauglichkeit. Sicherheits- und verteidigungspolitisches Meinungsbild in der Bundesrepublik Deutschland 2024, Zentrum für Militärgeschichte und Sozialwissenschaften der Bundeswehr, Forschungsbericht 137, 2024, p. 12, zms.bundeswehr.de.

Figure 3. Germany’s attitude to military and civilian service

Source: ARD-DeutschlandTREND April study, Infratest dimap, April 2025, infratest-dimap.de.

Chance of catching up on infrastructure investments

An equally crucial component of the package adopted, which allows for increased debt on defence, is the establishment of a special, debt-funded dedicated fund for infrastructure investments, in the interests of legislators covering both transport, energy, climate protection, education and wellness care, and digitisation. Without the approval of the CDU/CSU for specified a fund, there was no approval of the SPD (and the Greens) to substantially increase defence spending. By combining these projects, it is possible to avoid the political approach of investment in defence and infrastructure as competitive and mutually exclusive. More importantly, however, the fund opens the way for the ruling people to make up for serious and persistent investment delays in fresh decades. Mainly due to the deficiency of adequate resources, infrastructure has undergone widespread degradation in fresh years, which has increasingly affected citizens' regular lives. The financial needs are tremendous – for example, only investments in national roads require an estimated €180 billion^[15], rail 250 billion^[16], in hospitals – 50 billion^[17]and 67 billion in schools and kindergartens^[18]. In addition, investment in energy infrastructure related to Energiewende – e.g. electricity grid expansion costs are estimated to full EUR 650 billion^[19].

The allocation of an additional EUR 500 billion for a period of 12 years will not solve all the investment backlogs, but gives a chance to make up for them. However, whether this will win depends on a number of factors. Firstly, at this stage, it is not yet determined how priorities will be set and in which areas and to what degree fresh measures will be addressed. Their division has already become the subject of a game of interests of various sectors of the economy, which will effort to influence the rulers. The decision will be taken by both the current constitutional government and subsequent cabinets.

It is besides unclear whether the planned measures will be spent as intended. Experience with another funds (such as the Climate and Transformation Fund or the regular national budget)^[20] clearly shows that an crucial part of the money is not being used. The main problems include various regulatory and bureaucratic barriers, complex and lengthy procedures for investment planning and obtaining permits or yet many judicial complaints in Germany by local organisations, which in many cases block projects for months or even years.

In addition, 1 of the main obstacles to the investment will be the shortage of skilled workers and the limited capacity of companies, specified as the construction sector. There are already 1.5 million vacancies in Germany, and by 2035 this figure will increase to up to 7 million.^[21]. Most economists point out that without the essential deep structural reforms, frequently politically difficult, additional funds will either not be full utilized or will be spent in the incorrect way – for example, for poorly selected projects or for consumption purposes alternatively than for investment purposes.

Climate neutrality in the Constitution

In the context of the Green Fund, in negotiations with the CDU, CSU and SPD, they have achieved at least 2 crucial successes. 1 of them was the transfer of EUR 100 billion, i.e. as much as one-fifth of planned funds, to the Climate and Transformation Fund (KTF), from which backing is made for projects that are broadly understood Energiewende^[22]. The second is to include in the Basic Law the intent of carbon neutrality by 2045. Although it was recorded as a legal condition for spending funds from the NTF alternatively than as 1 of the general objectives of state policy, any lawyers believe this may constitute an crucial precedent which will affect the subsequent case law of the national Constitutional Court in matters relating to State climate policy.

Strengthening the budget of the NTF by an additional EUR 100 billion (for a period of 12 years) is part of the trend towards a continuation of the current model Energiewende. It will simplify the backing of energy transformation projects for the next government. As with these investments in transport, digital and educational infrastructure, it remains unclear for the time being, for which the next cabinets will allocate fresh resources. They can be spent on (co-)financing projects related, for example, to the expansion of electricity and heating networks or the construction of fresh distribution plants (mainly gas), but besides to the creation of hydrogen infrastructure (including retention facilities). They can besides be utilized to finance various instruments to decarbonise the manufacture (e.g. differential contracts), heating and heating (e.g. thermomodernisation of buildings or exchange of heat sources to low-carbon) and transport (e.g. by supporting electromobility or the improvement of collective transport).

Economic consequences

The fiscal package will have a affirmative impact on the German economy, but its full impact on the pace of economical growth will not be visible until 2028–2029 – mainly due to procedural and logistical factors. According to the German Institute for economical investigation (DIW Berlin)^[23] The peculiar fund will make German GDP 1% higher in 2026 and on average 2% higher annually than it would have been without this package. The multiplier of public investment under the fund is estimated to be 2 – this means that GDP will increase twice as much as investment expenditure over the period considered. This will primarily contribute to the increase in request for services – including construction – which will translate into an increase in investment and private consumption. Increased defence spending will have small impact on GDP growth – this sector is not very crucial for the German economy. The added value of the defence manufacture is little than 1% of GDP.

Moreover, the forecasts show that the package will have a limited impact on long-term price increases due to unused production capacity in many industries, e.g. machinery. Taking into account the reactions of the European Central Bank and the increase in interest rates, inflation is expected to be higher annually after the introduction of the infrastructure fund.

Increases in public debt and interest are frequently cited as a threat to the economy. According to the German economical Institute (IW Köln) for 12 years of operation of the fund, the nominal value of the debt will increase to EUR 2.2 trillion (without taking into account the increase in defence spending as part of the debt brake. This means that government debt will emergence to 85% of GDP in 2037 (as of 2025 is 63% of GDP) and the yearly general government deficit will be around 3.3% of GDP. According to the national Court of Auditors, at the end of the period of operation of the package, interest could increase by an additional EUR 37 billion per year (for comparison: EUR 34 billion was allocated to them in 2024, representing 7.3% of full budget expenditure). There is simply a hazard of doubling the ratio of interest to taxation gross to 17% by 2037, which will make crucial consolidation pressure. It is so crucial to allocate the funds in fact to investments alternatively than inflationary consumption.

The issue of the compatibility of the introduction of the fund with the EU rules of the stableness and Growth Pact remains questionable. The European Commission is considering excluding defence spending to 1.5% of GDP per year under the ReArm Europe package as a regulation on the budget deficit limit, so that the RFN could fit in the limit. However, the future debt would be a problem, which will importantly exceed 60% of GDP. This will force the German ruling to negociate from the EC the scope of permissible investment expenditure. The force of expanding numbers of countries (including Italy and France) may lead to further loosening of EU fiscal rules; according to the fresh regulations of 30 April 2024, investments are treated in the same way as consumption. The immense investment needs of EU members may lead to a clause being added.

To the announcement of an increase in German public spending, capital markets reacted to an increase in the profitability of 10-year bonds from 2.6% to 2.9%. Similarly, the interest rates on French bonds (3.6%) and Italian bonds (4.0%) rose, indicating expanding uncertainty among investors. Nevertheless, German shares have gained and the euro has strengthened against the dollar, suggesting average economical recovery. These events coincided with the emergence of the American "index of fear" after president Trump announced duties. This may indicate that the impact of German fiscal plans on European markets has been overestimated. Stimulating home request through the introduction of a fiscal package has an chance to mitigate the effects of the US leader's trade policy, but perturbations in global markets origin advanced uncertainty and difficulties in forecasting the improvement directions of both German and European economies in general.