German parties agree to loosen fiscal rules to overhaul military, economy

A tectonic spending shift in Europe’s largest economy has been reached by the parties hoping to form the next government.

After a national election last month, Friedrich Merz’s conservatives and the Social Democrats (SPD) are currently negotiating a coalition. Next week, the German parliament will hear their ideas.

Merz, Germany’s likely successor chancellor, has seized the moment after Donald Trump’s White House shook up the transatlantic alliance and stressed the need for Europe to strengthen its own defenses.

After a heated argument last week between Trump and its president, Volodymyr Zelenskyy, Trump froze military aid to Ukraine, which fueled fears that the US might agree to end the conflict in Ukraine while leaving Europe.

In order to encourage investment and support an economy that has been struggling for the past two years, economists and investors have long urged Germany to reform its constitutionally established state borrowing caps, known as the “debt brake.”

The reform would result in a change to the borrowing laws that were put in place following the global financial crisis of 2008, which many now claim are ineffective and prevent Germany from being a fiscal haven.

Constitution amendment

Merz stated that the CDU/CSU and SPD would submit a motion to amend the constitution to remove defense expenditures above 1% of GDP from the debt brake.

In light of the dangers to our freedom and peace on our continent, he pledged to do “whatever it takes” when it comes to defense.

A commission of experts will develop a proposal for updating the debt brake to permanently increase investment.

INSA poll found that only 28% of Germans oppose loosening the debt brake, compared to 49 percent of those polled. However, a two-thirds of parliament is necessary to pass a special fund and change the debt rules.

Given that far-right and far-left parties will have a blocking minority in the upcoming parliament after winning favors in the election last month, the conservatives and SPD are rushing to pass the legislation.

If Germany reclaims its debt to pay defense costs, the left-wing group has threatened legal action.

The Greens party, who needs to pass the debt-bargaining reform, promised to review the proposals, but made no concrete commitment.

Despite the announcement’s impact, skeptical voices also persisted.

An outgoing parliament’s ability to make such significant, binding decisions was “extremely problematic,” according to Kyrill-Alexander Schwarz, a constitutional lawyer at the University of Wuerzburg.

Just ten days after the election, Merz, according to German newspapers, was breaking a campaign promise of fiscal responsibility.

That is voter deception, Mr. Merz! warned Bild, a top-selling magazine. “Merz turned the page in record time,” remarked Handelsblatt.

Left-leaning newspapers were indulgent. The Sueddeutsche Zeitung reported that Merz “broke his campaign promise.”

Germany’s debt-to-GDP ratio, according to Friedrich Heinemann of the ZEW economic research institute, could reach 100% by 2034. It currently has a 64 percent growth rate, which is significantly lower than the US, France, or Japan, which are both major industrialized nations.