German centre-right leader Friedrich Merz is not yet chancellor but, 10 days after his party’s election victory, he has vowed to spend “whatever it takes” to shore up Germany’s defence and civilian infrastructure.
On Tuesday the centre-right Christian Democratic Union (CDU) leader announced an unorthodox plan to recall the old Bundestag parliament later this month.
It will be asked to set aside debt rules temporarily and back borrowing of at least €900 billion for urgent security and infrastructure spending. ““We know we have to do more,” said Merz at a press conference after reaching agreement with his likely coalition ally, the centre-right Social Democratic Party (SPD). “We are both aware that Europe and Germany will have to make huge efforts to increase Europe’s defensive capabilities.”
With growing security risks in Europe, the plan would boost by around €500 billion, or one per cent of gross domestic product (GDP) Germany’s nearly-exhausted off-balance sheet “special fund” for defence spending – without breaching budgetary rules. A similar €500 billion off-balance sheet instrument was agreed for infrastructure investment.
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With this “double bazooka”, the Merz-lead CDU hope to square a tricky political circle: meet urgent spending commitments without breaking an election promise to retain Germany’s so-called “debt brake”.
This limits the structural deficit to 0.35 per cent of gross domestic product (GDP) and is anchored in the constitution, requiring a two-thirds majority to change.
The same super majority is needed to back the huge proposed borrowing. That is why time is of the essence: in the outgoing parliament, but not the incoming parliament, centrist parties have this majority.
The CDU proposals have tested the patience of their would-be coalition allies in the Social Democratic Party (SPD), who have been pushing for full-scale reform of the debt brake.
At the very least the SPD want Germany to adopt EU proposals for defence spending to be excluded from debt calculations.
On Tuesday SPD co-leader Lars Klingbeil backed the ad hoc funds on condition of further debt brake reform in the coming parliamentary term.
“Our country is running on fumes,” he added, welcoming massive spending in German roads, bridges and railways.
The SPD secured a powerful ally on Tuesday in Frankfurt when the respected Bundesbank, Germany’s central bank, presented proposals to allow borrowing of up to 1.4 per cent of GDP.
Bundesbank president Joachim Nagel said the brake was a sensible safeguard for sustainable public finances in principle. Yet Germany was “doing well by international standards” with a debt ratio of 62.4 per cent.
The Bundesbank’s proposal suggested an additional debt-financed €220 billion up to 2030, provided that the debt ratio is below 60 per cent, the EU ceiling.
Above 60 per cent, it said, and the investment fund would be capped at around €100 billion. Economists gave a mixed reception to the decision for further ad hoc arrangements over full debt brake reform.
“But we should be happy that Germany, finally, has come to realise that it must act to confront these challenges,” said Prof Jens Südekum of Düsseldorf’s Heinrich Heine University and part of an economic panel consulted on the proposals.
