Germany’s Parliament Passes Historic Defence Spending
Germany’s parliament passed a historic bill on March 18 that unlocks a record level of state borrowing for defence & infrastructure spending.
This would be achieved through amending the country’s constitutionally enshrined fiscal rules.
The incoming chancellor, Friedrich Merz, needed a two-thirds majority in parliament to implement his plan. The vote passed with 513 votes in favour—above the 489 required.
However, to become law, it still needs a two-thirds majority in the Bundesrat, Germany’s upper house representing the country’s states.
The Bundestag vote followed weeks of debate. Merz’s Christian Democratic Union and would-be coalition partners, the Social Democrats, unveiled plans to unleash hundreds of billions in spending.
Merz faced a tense race to push the proposal ahead of the new parliament convening on March 25. During the time, the far-left Die Linke and far-right Alternative for Germany would have the ability to block the package.
The Greens were initially reluctant to support the bill until Merz made some concessions. The deal is that €100 billion of the special fund would support climate economic transformation measures.
The historic deal marks a shift away from decades of fiscal conservatism. Of the proposals, defence spending above 1% of Germany’s GDP is effectively exempt from the country’s “debt brake.“ The German parliament enshrined the debt brake the country’s constitution in 2009 following the 2008/2009 financial crisis.
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Germany’s Historic Defence Spending Package
A €500 billion special fund will also be created to finance infrastructure projects outside the ordinary budget over the next decade, giving Germany’s 16 states leeway to borrow the equivalent of around €15 billion.
Merz—who campaigned against reforming the debt brake throughout his career—has framed his U-turn as necessary in response to a changing security landscape.
According to the economic think tank Ifo, most economists favour incurring debt to finance additional security and defence needs but have repeatedly noted that the infrastructure package should be accompanied or replaced by substantial reforms in other areas.
The law still needs a two-thirds majority in the Bundestag, Germany’s upper house. The CDU, SPD, and the Greens need the backing of another party to ratify the legislation.
Market optimism and economic forecast upgrades
On March 18, markets embraced Germany’s fiscal stance shift. The euro climbed to 1.090, heading for a second straight week of gains, while the yield on Germany’s 10-year Bund rose six basis points to 2.90%.
The DAX rose 1% to close at 23,381, nearing record highs, outperforming its European peers. Autos led gains, with Mercedes-Benz (2.2%), BMW (1.8%), VW (1.1%), and Continental (1.3%) advancing. At the same time, financials rallied as Allianz, Deutsche Bank, and Commerzbank added between 1.4% and 4.2%.
Broader European markets followed suit, with the Euro STOXX 50 rising 0.7% and the STOXX 600 climbing 0.6%. In addition, the French CAC 40 climbed 0.5%, and the UK FTSE 100 gained 0.3%.
