Germany’s potential governing coalition announced on Tuesday that they plan to ease restrictions on government borrowing to facilitate increased defense spending. This move has gained urgency amid growing concerns over the reliability of the United States’ commitment to its European allies.
Additionally, the coalition partners intend to establish a €500 billion ($533 billion) fund to modernize Germany’s aging infrastructure over the next decade. Their goal is to revitalize Europe’s largest economy, which has been in decline for the past two years, and put it back on a path of steady growth.
Walking the talk
Friedrich Merz, leader of the center-right party and the winner of Germany’s recent election, is currently negotiating a coalition with the center-left Social Democrats, led by outgoing Chancellor Olaf Scholz. Merz stated that both parties will propose exempting defense expenditures exceeding 1% of the country’s GDP from the existing borrowing limits.
These proposals, along with the infrastructure investment plan—both to be funded through loans—are set to be presented to the outgoing German parliament next week. Recent geopolitical developments have further emphasized the need to strengthen the country’s long-overlooked military capabilities.
“In light of the increasing security threats, it is clear that Europe, including Germany, must make rapid and substantial efforts to enhance its defense readiness,” Merz told reporters.
While emphasizing the importance of the U.S.-European alliance, Merz acknowledged that Germany must significantly expand its defense budget. He hinted at recent shifts in American foreign policy, particularly regarding Ukraine, though he did not provide specific details.
Merz invoked the phrase “whatever it takes,” stressing that ensuring Europe’s security and preserving peace must now be top priorities. A long-time advocate of transatlantic cooperation, he has also expressed the need for Europe to become more self-sufficient in matters of defense, citing past comments from the Trump administration that implied a waning U.S. interest in European affairs.
Following Russia’s full-scale invasion of Ukraine in 2022, Scholz committed to increasing Germany’s defense budget to meet NATO’s 2% GDP target and established a €100 billion special fund to modernize the military. While this enabled Germany to reach the target, the fund is projected to be depleted by 2027.
Bavarian Governor Markus Söder, a key conservative ally of Merz, acknowledged concerns about the U.S.’s shifting stance, stating that many Germans share a sense of uncertainty about the situation.
Debt Brake
Germany’s constitutional “debt brake” currently limits new borrowing to just 0.35% of the country’s annual GDP, though exceptions can be made during national emergencies. This rule was temporarily suspended for three years following the COVID-19 pandemic in 2020.
Since the “debt brake” is enshrined in the constitution, any amendment would require a two-thirds majority in parliament. This could prove challenging, given that the far-right Alternative for Germany (AfD) and the left-wing Left Party collectively hold more than one-third of parliamentary seats. While AfD champions strict fiscal policies, the Left Party opposes the “debt brake” but remains skeptical about increased military spending.
Until the new parliament is formally convened—likely in late March—the outgoing legislature remains in session. The prospective coalition will still need backing from either the environmentalist Greens or the pro-business Free Democrats to move forward with their proposals. However, the Free Democrats have already expressed opposition to further debt accumulation.
Lars Klingbeil, co-leader of the Social Democrats, stated that both his party and Merz’s conservatives have also agreed to reassess the “debt brake” by the end of 2025 to enable greater public investment in the future.
Merz added that the infrastructure plan is expected to encourage significant private investment as well. He emphasized the urgency of improving Germany’s competitiveness in the global market.
While the coalition partners must still negotiate various policy details before finalizing their agreement, forming a government with alternative party alliances appears politically unfeasible at this stage.
