Lawmakers in Germany took a step to loosen a long-standing limit on government debt. The move aims to allow the Bundesrepublik to borrow hundreds of billions of euro for investment in infrastructure, climate and defense, including more aid for war-ravaged Ukraine.
The Bundestag, the lower house of German legislature, voted on Tuesday to reform a constitutional rule that has been curbing government borrowing since the last global financial crisis. The decision facilitates the adoption of a massive spending bill and the establishment of a €500 billion (over $540 billion) infrastructure and climate fund. It also frees Berlin’s hands to significantly boost military spending.
Outgoing parliament approves easing of ‘debt brake’ in Germany
According to Germany’s constitution, or the “Basic Law,” the state should spend only as much as it collects, the national broadcaster Deutsche Welle (DW) explained in a recent article. With that in mind, all German states, the 16 Länder, were required to strictly maintain balanced budgets while the federal government could borrow up to 0.35% of the gross domestic product (GDP).
To amend the so-called “debt brake” rule, introduced in 2009 under then Chancellor Angela Merkel, a two-thirds majority was needed and it could be found only in the current parliament. The reform was approved by 513 of its members (MPs) while 207 rejected the proposal.
Support came from the center-right alliance of the Christian Democratic Union (CDU) and the Christian Social Union (CSU), the center-left Social Democrats (SPD) and the Greens. The initiative was opposed by the far-right Alternative for Germany (AfD), the liberal Free Democrats (FDP) and the Left Party (Die Linke) who had tried to stop it in court.
Besides the Bundestag, the changes must be approved by the Bundesrat, the upper house of parliament representing the states on federal level, which will vote on Friday. Federal elections in Germany were held in February and the new parliament is due to convene on March 25.
The two “Union parties” and the SPD are expected to form a coalition government likely to be headed by CDU leader Friedrich Merz. The incoming chancellor managed to secure backing from the Greens who are part of the outgoing cabinet of Olaf Scholz (SPD) but will soon be in opposition.
Merz ready to do ‘whatever it takes!’ to boost military investment
The bigger part of the €500 billion Germany may borrow in the next decade is to be spent on modernizing its aging infrastructure, including in the energy and water sectors, education and healthcare systems, and to speed up digitalization. Some €100 billion should go for climate goals.
Spending on defense will be increased through loans which will be used not just to fund the Bundeswehr and German security services, but also in support of “countries attacked in violation of international law,” DW noted. Berlin intends to send Ukraine military aid for at least €4 billion this year.
Merz was quoted as stating he would do “whatever it takes!” in regards to military investment while Scholz called the decision to uncap German defense spending “historic,” a sentiment echoed by NATO Secretary General Mark Rutte who congratulated both on X.
Congratulations to @Bundeskanzler & @_FriedrichMerz on historic agreement in Germany to massively boost defence investment. This sends a powerful message of leadership and commitment to our shared security. It will make a profound difference in NATO’s ability to deter and defend.
New debt burden estimated to reach up to €1 trillion
European stocks rallied on the news of the debt brake reform and fiscal package on Tuesday, but economists quoted by German media have expressed concerns of potentially serious consequences for the financial markets if Europe’s economic powerhouse takes on large amounts of new debt.
According to Lars Feld, professor at the Walter Eucken Institute in Freiburg, the national debt of Germany may reach 90% of GDP over the next 10 years from the current 62%, which could lead to additional interest costs of up to €400 billion.
Rising interest rates on German government bonds will translate into higher rates for EU nations with already high debts, like Spain or Italy, warned Veronika Grimm, professor at the Technical University of Nuremberg. Both addressed members of the Bundestag’s budget committee.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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