Tuesday 18 / March / 2025
This is unprecedented in the history of the Bundestag, Germany's lower house of parliament.
On Tuesday, parliament will vote on a bill that will make it possible to take on unprecedented levels of debt to invest in the military, civil infrastructure and climate protection over the coming years. All 16 federal states will be allowed to take on a limited amount of debt in the future.
The bill was drafted by the center-right bloc of the Christian Democratic Union and the Christian Social Union (CDU/CSU) and the centre-left Social Democratic Party (SPD). The two parties are currently negotiating the formation of a new federal government that CDU party leader will likely lead as the new chancellor.
However, to gain a majority in parliament, they will need the Green Party, part of the last German government and now likely in the opposition in the coming years. Following tough negotiations between the four parties, the Bundestag's Budget Committee decided on Sunday to recommend that parliament approve the draft bill.
Here are the details of the plan:
Easing the debt brake
Germany's Basic Law, the country's constitution, stipulates that the state may only spend as much money as it takes in. While the 16 federal states are under a strict obligation to comply, the federal government can borrow within certain limits — up to 0.35% of gross domestic product (GDP), the annual economic output.
For expenditures necessary for the country's defence, the debt brake will be virtually nullified. The draft resolution for the Bundestag states that funds for the Bundeswehr, as well as "federal expenditure on civil defense and civil protection, intelligence services, the protection of information technology systems, and aid to countries attacked in violation of international law," may be financed via loans in the future. This also includes military aid to Ukraine, which is set at €4 billion ($4.6 billion) for 2025 and to which a further €3 billion will probably be added in the near future.
The new regulation applies to all costs that exceed 1% of gross domestic product (GDP). Based on the economic output achieved in 2024, 1% of GDP is around €43 billion. Anything above this amount will no longer be subject to limits.
Merz described the significance of this regulation by saying he would do "Whatever it takes!" in terms of military investment.
Loans for the federal states
The strict debt ban for the federal states is to be relaxed and brought in line with the federal government. All federal states combined will then be allowed to take on new debt amounting to up to 0.35% of GDP. How the respective sums are to be allocated will be determined by a future federal law.
One problem is that the federal states would have to adopt the new regulation into their respective state constitutions. However, most state governments could not muster the parliamentary two-thirds majority that would be required for this.
An alternative way to make the changes possible would be to amend the Basic Law to annul state law. However, this would be a serious encroachment on German federalism.
Special funds for infrastructure
Germany has significant infrastructure problems. Roads, bridges and railroads have been worn out over decades, with little attention paid to maintenance. There is also an urgent need to modernize energy and water infrastructure, telecommunications, schools, universities, and hospitals. At the same time, the country's digitalisation is lagging behind, and the conversion and expansion of climate-neutral energy infrastructure is also far from complete.
Article 143h will be added to the Basic Law, stipulating that €500 billion in debt may be raised over the next 12 years for investment in infrastructure. Of that amount, €100 billion will go to the federal states for their infrastructure and €300 billion to the federal government. The remaining €100 billion is earmarked for climate protection. The draft bill also stipulates "additional investments to achieve climate neutrality by 2045."
A rule for additional spending
The money is also to be used for investments that have already been planned. This requires that at least 10% of the total budget be earmarked for future investments in the regular federal budget. That would have been around €47 billion based on the 2024 budget. Only funding that exceeds this amount may come from the loan-financed special fund.
The debt package has critics
The far-right Alternative for Germany (AfD) and the Left Party are against the debt package proposals for very different reasons.
Following the recent election, the AfD and the Left Party together will hold over one-third of the 630 Bundestag seats and will be in a position to block the debt package.
This is why the CDU/CSU and SPD will seek to get their bill passed by the "old" Bundestag, where they still have more than two-thirds of the seats together with the Greens.
This parliament is still in session until March 25, when the new parliament will be constituted.
The AfD and the Left Party have tried to stop the old Bundestag vote but failed in their appeals before the Federal Constitutional Court.
Far-reaching financial consequences
Economists warn of serious consequences on the financial markets if Germany were to incur almost €1 trillion in new debt. Lars Feld, professor at the Walter Eucken Institute in Freiburg, expects Germany's national debt to increase from its current level of around 62% to 90% of annual economic output over the next ten years.
This would result in an additional interest expenditure of between €250 and €400 billion, depending on the development of the interest rate for state bonds, Feld said at a budget committee hearing in the Bundestag. The international bond markets had already become nervous.
Veronika Grimm, Professor at the Technical University of Nuremberg, sees a "challenge for stability in Europe," as she put it in front of the Budget Committee. If interest rates for German government bonds rise, this will cause interest rates for already highly indebted countries such as Italy and Spain to rise to levels these countries can hardly manage.
Grimm warned that this would once again increase "vulnerability in the eurozone."
