Germany’s move to unlock hundreds of billions of euros in debt-financed defense and infrastructure spending passed its final legislative hurdle on Friday when lawmakers in the upper house of parliament in Berlin approved the measures.
An alliance of Chancellor-in-waiting Friedrich Merz’s conservatives, the Social Democrats and the Greens rammed the unprecedented investment package through the lower house on Tuesday and together controlled enough votes in the Bundesrat, where Germany’s 16 federal states are represented, to ensure its backing there too.
The bill passed with 53 votes in favor, more than the required two-thirds majority of 46 and paving the way for President Frank-Walter Steinmeier to sign it and submit it for publication in the Federal Law Gazette.
Investors have been closely watching the passage of the measures, which end decades of German austerity and usher in a new period of deficit spending designed to boost Europe’s biggest economy and modernize creaking infrastructure.
The armed forces is also a focus, with Merz and the Social Democrats — his prospective partners in the next government — committed to a massive military buildup after years of neglect, as well as continued backing for Ukraine.
Merz said this week that wherever possible defense contracts should go to European manufacturers. Contractors ranging from Thyssenkrupp AG to BAE Systems Plc and smaller drone makers stand to gain the most, Bloomberg reported Monday.
Merz and the SPD have been forced to act after President Donald Trump pulled back from US commitments to European security, laying bare the increased threat to the region from President Vladimir Putin’s Russia.
Meanwhile, Germany’s economy has stagnated for two years and Merz has pledged to tackle structural problems including high energy costs and tangled bureaucracy.
Markets have generally reacted positively to the fiscal shift, which Bloomberg economists say should help bolster growth across the euro region.
“If you look at Germany from the outside, what we’re hearing in Europe and from countries beyond Europe is an overwhelmingly positive assessment of what we have agreed,” Merz said earlier Friday at a FAZ newspaper forum in Berlin.
Germany’s Spending Package:
- Defense spending in excess of 1% of gross domestic product will be released from constitutional borrowing restrictions
- Special, off-budget infrastructure fund will be empowered to borrow as much as €500 billion ($542 billion) over 12 years
- Of that amount €100 billion will be transferred to the Climate and Transition Fund and states will receive €100 billion for regional projects
- Germany’s 16 states will have leeway to borrow as much as 0.35% of GDP, or the equivalent of around €16 billion, instead of having to run balanced budgets
After the passage of the spending bill, attention turns to the coalition talks. Merz’s conservatives and the Social Democrats aim to have an agreement in place by Easter at the latest, though there have been rumblings in recent days that the negotiations could drag on longer.
A coalition deal would pave the way for Merz to secure Bundestag approval to take over as chancellor from Scholz, who has been running the government in a caretaker capacity since the CDU/CSU’s February election victory.
“The next German government must put the economy back on a growth path — and this also requires unpopular decisions,” Tanja Gönner, head of the BDI industry lobby, said Thursday.
“There can and must be no way around bold structural reforms, efficient use of budget funds and clear priorities for investments,” she added.
