Germany set to spend big on army and infrastructure

The center-right bloc of the Christian Democratic Union (CDU) and Christian Social Union (CSU) and the center-left Social Democratic Party (SPD) are negotiating the terms for forming a governing coalition. How to plug the huge hole in the budget had been expected to become a major sticking point: At the beginning of their exploratory talks, they determined that at least €130 billion ($139 billion) are missing in state coffers for the next four years.

But that is not all. Top German economists have calculated that about €400 billion will be needed to further arm the German military in the coming years. And up to €500 billion will be required to revamp Germany's ailing infrastructure, including roads, bridges and railroads.

The potential coalition partners are now drawing conclusions from these figures: They want defense spending over 1% of gross domestic product to be exempt from the restrictions of the debt brake enshrined in Germany's constitution, which severely restricts the state from taking out loans.

"In view of the threats to our freedom and peace on our continent, 'whatever it takes' must now also apply to our defense," the CDU chairman and likely next German chancellor, Friedrich Merz, said on Tuesday evening.

In addition to lifting the debt ceiling, a new special fund of €500 billion would be set up for infrastructure spending for a period of 10 years. The federal states would receive €100 billion of this. "We are finally clearing the investment backlog in our country," said SPD leader Lars Klingbeil.

An amendment to the debt brake should also allow the federal states to take out debt to the tune of 0.35% of their economic output. This was previously only possible for the federal government.

Next week, the CDU/CSU and SPD parliamentary groups want to hold a session of the Bundestag, the lower house of parliament, to introduce and pass the motions to amend the Basic Law. This requires a two-thirds majority. The caretaker parliament can reach that quota if the Green Party lawmakers support the CDU/CSU/SPD motion.

The new parliament elected on February 23 must convene no later than March 24. In the new composition, the Green Party is diminished, as is the SPD. Therefore, a two-thirds majority would require either the Left Party or the far-right Alternative for Germany (AfD) to support the CDU/CSU and SPD in their motion, which is very unlikely: The AfD rejects any change to the debt brake, while the Left Party opposes any increase in military spending.

Special funds to bypass the debt brake

In 2024, the entire federal budget amounted to €467 billion, €25 billion of which were loans, whilc the rest came from taxes and other revenues.

But there is a way to bypass the debt brake: Loans can be taken out as special funds called "Sondervermögen" which are then counted as state assets and managed separately, so the debt brake does not apply to them. They do not have to be approved by parliament every year, but only once with a two-thirds majority in both the Bundestag and the upper house of the German parliament, the Bundesrat. They can then be spent over a period of years.

Two special federal funds were launched in 2022. The first as a consequence of the Russian invasion of Ukraine. The Bundestag approved a credit line of €100 billion to rearm the Bundeswehr, which had been neglected for decades. This money will be used up by 2027. A second special fund with a credit line of €200 billion euros was set up to support the ailing economy in the subsequent energy crisis.

In 2023, the federal authority that monitors the budget and economic management of the federal government criticized these "special assets" in a report stating that it would be more accurate to speak of "special debts," describing them as "largely outsourced debt pools."

The Federal Audit Office has calculated that the larger existing special funds alone total about €869 billion. Only a tenth of this is based on assets. The office counted a total of 29 special funds, the oldest of which dated back to the 1950s, set up after World War II for reconstruction and financed largely by the United States as part of the so-called Marshall Plan.

In 2008 a large special fund was set up to offset the financial crisis, and, in 2020, the Economic Stabilization Fund (WSF) was set up to counteract the economic and social impact of the COVID-19 pandemic on the national economy.

In 2023, the Federal Constitutional Court ruled that the €60 billion in the COVID-19 fund that had not been spent could not be repurposedfor policy measures such as mitigating the effect of climate change.  This dealt a major blow to the three-way center-left government of Chancellor Olaf Scholz, which ultimately collapsed in November 2024.

Expenditure on interest is enormous

Now considerable additional debts will likely be added on top of existing loans and would be counted toward the national debt under EU debt rules. In the EU member states, the debt level may not exceed 60% of economic output. Countries with a debt level above this face penalty payments if they don't reduce their debt ratio.

Loans are taken out on the financial market, so interest needs to be paid. Over decades, Germany has amassed a mountain of debt totaling €1.7 trillion. In 2024, €33 billion in the budget were earmarked for interest payments alone, and interest payments go up with rising inflation.

Lawyers and economists are already warning that additional debt-financed special funds would further increase the interest burden and further exacerbate the budgetary situation, which would ultimately restrict political leeway.

This article was originally written in German.

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