German parliament approves debt reform, spending package

18th Mar 2025 09:14

(Sharecast News) - Germany's parliament has approved an historic package of spending and debt limit reforms, potentially clearing the way for a massive boost in defence and infrastructure spending for Europe's biggest economy.

The Bundestag passed the measures with 513 votes in favour, above the 489 required for a two-thirds majority. There were 207 votes were against.

Chancellor-in-waiting Friedrich Merz had argued ahead of the vote that the changes were needed to boost the country's troubled economy and lift defence spending in the face of a growing threat from Russia. He faced criticism that he wasn't linking what could be up to €1trn in extra stimulus to demands for reform.

Merz, leader of the conservative CDU/CSU alliance which won the largest share of the vote at the recent federal election, put the plan together with the Social Democrats and also won crucial support from the Green Party in return for a €100m environmental and climate-related fund.

The move is a response to US President Donald Trump's pivot towards Russian leader Vladimir Putin over his war on Ukraine and ultimatums that Europe should raise defence spending.

"Putin's war is not only directed against Ukraine, but also against Europe - against our security and our freedom. We will defend ourselves against these attacks with everything at our disposal in the coming years and decades," Merz told parliament during the debate on Tuesday.

'FISCAL BAZOOKA'

Under the German proposal, defence civil defence, intelligence services and cybersecurity spending above 1% of GDP would be exempt from the debt brake rules - which currently limit new borrowing to 0.35% - effectively writing a blank cheque on weapons purchases. The restrictions were enshrined in law after the global banking industry caused the financial crash of 2008.

There will also be a €500bn fund for infrastructure such as rail and roads, which would run over 10 years, and Germany's 16 states will be allowed to collectively borrow up 0.35% of nominal GDP.

The package now must clear the upper house, or Bundesrat, where the legislation also requires a two-thirds majority.

Berenberg economist Holger Schmieding called the changes a "fiscal bazooka" and said he expected defence spending to creep up by 0.2 - 0.3 percentage points of GDP per year "for at least the next five years and additional infrastructure spending to raise demand by an additional 0.2 - 0.3ppt year-by-year over that period".

"Instead of a big one-off shift to a higher level of GDP, Germany is heading for a prolonged period of stronger gains in demand. However, some of the money will be spent on armaments from abroad, especially in the early phase. In addition, the extra public spending and firmer private spending due to a positive confidence effect will partly fuel inflation instead of lifting real GDP due to capacity constraints."

"As a rough guess, Germany's fiscal bazooka may raise its rate of real GDP growth by around 0.3ppt for the next few years. Expecting the fiscal boost to be passed, we lifted our German growth forecasts last Friday from 1.2% for 2026 and 1.0% for 2027 to 1.4% for both years after 0.1% this year. German inflation will likely creep up to 2.4% in 2026 and 2.5% in 2027 after 2.3% this year.".

Reporting by Frank Prenesti for Sharecast.com