Agreement between CDU/CSU and SPD on increasing defence and infrastructure spending

On 4 March, the CDU/CSU and the SPD, which are expected to form the new government, reached an agreement on a package of financial measures for defence and infrastructure. Defence spending exceeding 1% of GDP will be exempt from the debt brake mechanism (see ‘The debt brake: Germany in a crisis of uncertainty‘). A special off-budget fund worth €500 billion will also be established for a period of 10 years, with €100 billion allocated to federal states and municipalities. The fund will be used to finance investments in research and development as well as transport, education, energy, and healthcare infrastructure. For the federal states, the debt brake will be raised to the level applicable to the federal budget – 0.35% of GDP (currently 0%).

The agreement must be ratified through an amendment to Germany’s Basic Law, requiring a two-thirds majority in the current Bundestag before the new parliament is constituted; it must then be approved by two-thirds of Bundesrat members. A corresponding law on the permanent reform of the debt brake, aimed at enabling increased investment spending and based on recommendations from a designated panel of experts, is expected to be passed by the end of the year. Additionally, in the first half of the year, the government will introduce legislation on planning and accelerating procurement for the Bundeswehr, along with a list of priority acquisitions for the armed forces.

The arrangements between the prospective coalition partners remain subject to negotiations and may be revised. This is because they require the support of the Greens, who have criticised their exclusion from previous talks. However, they are likely to accept the changes if their priorities are incorporated, such as using the fund to finance climate protection projects. The proposed debt brake reform has also faced criticism from numerous economists, liberals, and some Christian Democrats, including prominent politicians, as well as representatives of the Alternative for Germany (AfD), all of whom have accused the CDU/CSU of excessive spending and breaking election promises.

The agreement between the Christian Democrats and the Social Democrats, reached even before the formation of a new government, together with the scale of the proposed investments and the push for rapid implementation, has resolved a key budget policy dispute that could have divided the future coalition partners. The decision to boost defence spending and allocate €500 billion for civilian investments will significantly strengthen the political position of Friedrich Merz and his government, both domestically and internationally. The initiative is designed not only to stimulate the German economy but also to reinforce Germany’s role in shaping Europe’s security policy.

Commentary

• The legislative path chosen by the CDU/CSU and the SPD has sparked controversy, as their proposals are set to be approved by the Bundestag before its term ends on 25 March. This approach aims to secure the required two-thirds constitutional majority for the changes with the support of the CDU/CSU, the SPD, and the Greens, followed by the Bundesrat’s approval later in March. This course of action results from the Left and the AfD gaining a so-called blocking minority in the new Bundestag following the last parliamentary elections, which means that the future government would have to negotiate with one of these parties to amend the Basic Law.
• The approved investment package will have a limited impact on the country’s short-term economic growth. The German defence industry’s contribution to GDP is less than 1%, with annual revenues ranging between €10 billion and €20 billion. The infrastructure fund’s effect on economic growth could be constrained by labour shortages and excessive bureaucracy, including at the local government level. In the short term, economic stagnation could be addressed by combining the proposed funding with a reduction in reporting obligations and social benefits, as well as a more efficient redistribution of resources. However, the positive economic impact will become evident in the medium and long term, as the package enables long-term planning and expands production capacity in the defence and construction industries, stimulating other sectors.
• The agreement between the future coalition partners also reflects Germany’s growing uncertainty regarding the consequences of Donald Trump’s policies. His push to normalise relations with Russia and plans to scale back the US military presence in Europe have been interpreted in Berlin as the beginning of the end for the European security order which has relied on the US as its guarantor. This assessment is further reinforced by reports that the United States has suspended military aid to Ukraine following Trump’s widely criticised meeting with President Volodymyr Zelensky. The decision to increase defence spending is intended to strengthen the new government’s position in negotiations with the Trump administration, which has criticised Germany for its insufficient defence budget. The increase in military expenditure will also be presented as part of Germany’s effort to “reclaim its leadership position” in Europe, a role that the United Kingdom and France have recently taken on.