Germany will allocate hundreds of billions of euros for defense and infrastructure: a large-scale package has passed parliament

Germany's move to unlock hundreds of billions of euros in debt-funded defense and infrastructure spending passed its final legislative hurdle on Friday, as lawmakers in the upper house of parliament - the Bundesrat - approved the measures, Bloomberg reported, UNN writes.

Details

The alliance of conservatives of future German Chancellor Friedrich Merz, Social Democrats and the Greens pushed the unprecedented investment package through the lower house of parliament on Tuesday and jointly controlled enough votes in the Bundesrat, where the 16 federal states of Germany are represented, to ensure its support there as well.

The bill was passed by 53 votes in favor, exceeding the required two-thirds majority of 46 and paving the way for German President Frank-Walter Steinmeier to sign it and submit it for publication in the Federal Law Gazette.

As DW points out, the large-scale financial package approved by the Bundesrat on Friday implies a weakening of the "debt brake" for defense spending and for the needs of the federal states, as well as the allocation of 500 billion euros for a special infrastructure fund.

Investors are closely watching the passage of measures that will end decades of austerity in Germany and usher in a new period of deficit spending designed to stimulate Europe's largest economy and modernize its creaking infrastructure, the publication writes.

German debt has continued to rise since the bill's approval, pushing 10-year bond yields close to a two-week low of 2.76%.

The German armed forces are also in the spotlight, as Merz and the Social Democrats - his potential partners in the next government - have pledged to massively build up military power after years of neglect, as well as continue to support Ukraine.

Bundestag supports reform of "debt brake": what it means18.03.2025, 17:44 • 15777 views

This week, Merz said that, where possible, defense contracts should be awarded to European manufacturers. Contractors from Thyssenkrupp AG to BAE Systems Plc and smaller drone manufacturers will benefit the most, Bloomberg reported on Monday.

Meanwhile, the German economy has been stagnating for two years, and Merz has promised to address structural problems, including high energy costs and tangled bureaucracy.

Markets have generally reacted positively to the fiscal shift, which Bloomberg economists say should help spur growth in the eurozone.

"If you look at Germany from the outside, what we hear in Europe and countries beyond is an exceptionally positive assessment of what we have agreed," Merz said earlier Friday at a forum of the FAZ newspaper in Berlin.

What the German spending package provides for:

• Defense spending exceeding 1% of gross domestic product will be exempt from constitutional borrowing limits;
• A special off-budget infrastructure fund will be authorized to borrow up to 500 billion euros ($542 billion) over 12 years;
• Of this amount, 100 billion euros will be transferred to the Climate and Transition Fund, and the Länder will receive 100 billion euros for regional projects;
• Germany's 16 Länder will have the freedom to borrow up to 0.35% of GDP, or the equivalent of about 16 billion euros, instead of running balanced budgets.

"I am pleased that the Bundesrat has also approved the historic changes to the Basic Law. We are breaking the shackles that have so far prevented us from investing sufficient funds in defense and infrastructure. Now Germany can fulfill its obligation," German Chancellor Olaf Scholz commented in X.

Addition

With the spending bill passed, attention turns to coalition talks. Merz's conservatives and the Social Democrats intend to reach an agreement no later than Easter, although there have been rumors in recent days that the talks could drag on.

A coalition agreement would pave the way for Merz to gain Bundestag approval to replace Scholz, who has led the government as interim chancellor since the CDU/CSU victory in February's elections.