Germany: Historic agreement to expand borrowing limits and increase defense spending

Germany’s incoming Chancellor, Friedrich Merz, announced an agreement to radically reform the country’s debt rules, allowing for a surge in defense and security spending, as well as €500 billion in infrastructure investment over the next 12 years.

This comes just days before a key parliamentary vote next week, a move that will facilitate the formation of the next German government.

“There will be no shortage of financial resources to defend freedom and peace on our continent,” Merz said, adding, “Germany is back, and its making a major contribution to defending freedom and peace in Europe”.

The next German chancellor needs the support of his Christian Democratic Union (CDU/CSU), his potential coalition partner, the Social Democratic Party (SPD), and the Greens, to pass the major reform package with a two-thirds majority in an emergency session of the old parliament next Tuesday.

The leader of the German Conservative Party added, “I expect, after Bundestag approval, to disburse €3 billion in military aid to Ukraine”.

A Green Party source said that the party had reached an agreement with the Christian Democratic Union (CDU/CSU) bloc and the Social Democratic Party (SPD) and was satisfied with the agreement.

Another source said that the agreement allocates €100 billion for climate policies.

German Finance Ministry officials are examining the debt agreement, according to sources from the Bundestag, while another source said the exact details of the deal are still being worked out.

The agreement is an important step towards moving away from decades of fiscal conservatism in Berlin, in an effort to boost infrastructure and defense spending.

Merz wants the outgoing Bundestag (which has full powers until the new one is inaugurated) to approve the remaining €500 billion in infrastructure spending and make sweeping changes to borrowing rules to revive growth and increase military spending in Europe’s largest economy, according to Politico.

During a heated debate in the German parliament on Thursday, Merz urged Green Party lawmakers to pass constitutional amendments that would expand the government’s borrowing power to spend nearly €900 billion to bolster the military and invest in the economy.

“Given the security situation in Europe, which is now worrying by all accounts… it’s no longer possible to postpone these proposed amendments to the constitution,” said Merz, who leads the conservative parliamentary bloc made up of the Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU).

Merz is seeking to pass the amendments through the current Bundestag, as the coalition comprising the three parties does not have a two-thirds majority in the next Bundestag, which emerged from the February 23 elections.

The Christian Democratic Union/Christian Social Union, winners of the February 23 election, and the center-left Social Democratic Party (SPD), are preparing to form a new government after the previous three-party coalition collapsed in November 2024 over spending disagreements.

To pass the package of three constitutional amendments, Merz needs to secure a two-thirds majority in the Bundestag.

When the new Bundestag convenes on March 25, the far-right Alternative for Germany (AfD) party, which critics accuse of being pro-Russia, and the Left Party, which opposes increased military spending, are expected to block the amendments, therefore, Friday’s agreement is doubly important, as it overcomes this obstacle.

For the Greens, the ongoing negotiations with the CDU/CSU and the Social Democratic Party (SPD) represent a last chance to extract political concessions before they move into the opposition.

In an attempt to win the Greens’ support, Merz pledged to expand defense spending—raising the debt ceiling to exceed 1% of GDP—to include costs for intelligence services and civilian protection, a key demand the Greens pushed during negotiations.

He also promised to allocate €50 billion of the proposed €500 billion infrastructure fund to climate policies, but the figure released in the agreement is much higher, reportedly €100 billion.

A vote on the borrowing expansion is expected next Tuesday, followed by a vote in the German Federal Council (Bundesrat) next Friday, while no major obstacles are expected in the Bundesrat—which represents Germany’s 16 states—a failure in the Bundestag would have jeopardized the entire financial deal.

In an effort to urge the Green Party to approve the agreement, Merz asked on Thursday, “What more do you want in such a short timeframe than what we have proposed to you in the past few days?”

He added, “Do you seriously believe that the US administration will agree at the NATO summit in The Hague at the end of June to continue pursuing the same approach within the alliance if Germany – along with its European NATO partners – isn’t prepared to take a new path?”

Merz’s comments came in light of US President Donald Trump’s call for European NATO allies to increase their defense spending.

Trump’s recent statements, which included hints that he wouldn’t protect NATO members who fail to meet spending targets, increased pressure on Germany to boost its defense spending.