This marks a historic moment for the Bundestag, Germany's lower house of parliament.
On Tuesday, lawmakers will cast their votes on a bill that would enable the government to incur unprecedented levels of debt aimed at investing in the military, civil infrastructure, and climate protection over the next several years. All 16 federal states will be permitted to assume a limited amount of debt moving forward.
The legislation has been proposed by the center-right coalition of the Christian Democratic Union and the Christian Social Union (CDU/CSU), along with the center-left Social Democratic Party (SPD). These two parties are currently in discussions to form a new federal government, which is expected to be led by the CDU party leader as the incoming chancellor.
To secure a parliamentary majority, they will require the support of the Green Party, which was part of the previous German government but is anticipated to be in opposition in the near future. After extensive negotiations among the four parties, the Bundestag's Budget Committee recommended on Sunday that parliament approve the proposed bill.
Here are the specifics of the initiative:
Relaxing the debt brake
Germany's Basic Law, which serves as the nation's constitution, mandates that the government can only spend what it earns. While the 16 federal states must adhere strictly to this rule, the federal government has the ability to borrow within certain constraints—up to 0.35% of gross domestic product (GDP), which represents the annual economic output.
To accommodate necessary defense expenditures, the debt brake will be effectively suspended. The proposed resolution for the Bundestag indicates that funding for the Bundeswehr, along with "federal spending on civil defense, civil protection, intelligence services, safeguarding information technology systems, and assistance to nations attacked in violation of international law," may be financed through loans in the future. This provision also encompasses military support for Ukraine, which is projected at €4 billion ($4.6 billion) for 2025, with an additional €3 billion likely to be allocated soon.
The new regulation will apply to all expenses that exceed 1% of the gross domestic product (GDP). Based on the economic output anticipated in 2024, 1% of GDP is approximately €43 billion. Any expenditures surpassing this threshold will no longer face restrictions.
Merz emphasized the importance of this regulation by stating he would do "Whatever it takes!" regarding military investments.
Loans for the federal states
The stringent debt restrictions for the federal states are set to be eased to align with those of the federal government. Collectively, all federal states will be permitted to incur new debt up to 0.35% of GDP. The distribution of these funds will be determined by future federal legislation.
A challenge arises as the federal states will need to incorporate the new regulation into their individual state constitutions. However, many state governments may struggle to achieve the necessary two-thirds parliamentary majority for this amendment.
An alternative approach to facilitate these changes could involve amending the Basic Law to override state legislation. However, this would significantly impact German federalism.
Special Infrastructure Funding
Germany faces significant challenges regarding its infrastructure. Many roads, bridges, and railways have deteriorated over the years due to insufficient maintenance. There is an urgent requirement to upgrade energy and water systems, telecommunications, educational institutions, and healthcare facilities. Additionally, the nation is falling behind in digitalization, and the transition to and expansion of climate-neutral energy infrastructure remains incomplete.
To address these issues, Article 143h will be incorporated into the Basic Law, allowing for the raising of €500 billion in debt over the next 12 years specifically for infrastructure investments. Of this total, €100 billion will be allocated to the federal states for their infrastructure needs, while €300 billion will be directed to the federal government. The remaining €100 billion is designated for climate protection initiatives. The proposed legislation also includes provisions for "additional investments aimed at achieving climate neutrality by 2045."
Guidelines for Additional Expenditure
The allocated funds will also support investments that have already been planned. To facilitate this, at least 10% of the overall budget must be reserved for future investments within the regular federal budget. Based on the 2024 budget, this would amount to approximately €47 billion. Only funds exceeding this threshold may be sourced from the loan-financed special fund.
The debt package faces opposition
The far-right Alternative for Germany (AfD) and the Left Party oppose the proposed debt measures for distinctly different reasons.
In the wake of the recent election, the AfD and the Left Party will collectively occupy more than one-third of the 630 seats in the Bundestag, giving them the ability to obstruct the debt package.
Consequently, the CDU/CSU and SPD are aiming to pass their legislation through the "old" Bundestag, where they still hold a majority of over two-thirds of the seats in alliance with the Greens.
This current parliament will remain in session until March 25, when the new parliament is set to be established.
The AfD and the Left Party have attempted to prevent a vote in the old Bundestag but were unsuccessful in their appeals to the Federal Constitutional Court.
Significant Financial Implications
Economists caution that the financial markets could face severe repercussions if Germany were to take on nearly €1 trillion in new debt. Lars Feld, a professor at the Walter Eucken Institute in Freiburg, predicts that Germany's national debt could rise from approximately 62% to 90% of its annual economic output within the next decade.
Feld indicated during a budget committee hearing in the Bundestag that this scenario would lead to additional interest expenses ranging from €250 billion to €400 billion, contingent on the trajectory of state bond interest rates. The international bond markets have already begun to show signs of unease.
Veronika Grimm, a professor at the Technical University of Nuremberg, described this situation as a "challenge for stability in Europe" during her address to the Budget Committee. She noted that if interest rates on German government bonds increase, it would likely lead to higher rates for already heavily indebted nations like Italy and Spain, pushing them to levels that could be unsustainable.
Grimm cautioned that this situation would further heighten the "vulnerability in the eurozone."
