Germany's Bundestag on Tuesday approved a landmark fiscal reform package, clearing the way for €500 billion ($548 billion) in defense and infrastructure investments while loosening the country's constitutionally mandated debt limits. The vote passed with 513 members in favor and 207 against, exceeding the two-thirds majority required to amend the German constitution.
The reforms mark one of the largest fiscal policy shifts in postwar Germany, altering long-standing debt rules to allow increased military and security spending, alongside significant investments in climate projects and economic modernization. The legislation now heads to the Bundesrat, Germany's upper house, for final approval on Friday.
Under the new framework, defense and security expenditures above a certain threshold will be exempt from Germany's debt brake-a fiscal constraint introduced after the 2008 financial crisis to cap the federal government's structural deficit. Loans funding the infrastructure and climate transformation initiatives will also fall outside debt restrictions. Additionally, individual German states will gain greater flexibility in managing their debt levels.
Friedrich Merz, leader of the Christian Democratic Union (CDU), underscored the urgency of the reforms, citing heightened security threats linked to Russia. "Putin's war of aggression against Europe" and daily acts of sabotage, espionage, and disinformation campaigns necessitated a fiscal "paradigm shift," Merz told parliamentarians. "We have, for at least a decade, felt a false sense of security. It's time to rebuild our defense capabilities, in part from scratch."
The CDU and its sister party, the Christian Social Union (CSU), proposed the package in collaboration with the Social Democratic Party (SPD). Negotiations with the Greens secured the final votes needed to push the legislation through the outgoing parliament, allocating €100 billion of the infrastructure fund specifically for climate and economic transformation efforts.
Markets responded positively to the anticipated reforms, with the euro reaching a five-month high ahead of the vote. Investors and economists welcomed the fiscal boost, though some analysts cautioned that the spending injection alone would not resolve Germany's broader structural challenges.
"This is a historic fiscal regime shift, arguably the largest since German reunification," said Robin Winkler, chief German economist at Deutsche Bank Research. "Yet, as with reunification, a fiscal expansion does not guarantee success: the next government will need to deliver structural reforms to turn this fiscal package into sustainable growth."
Germany's economy narrowly avoided recession through 2023 and 2024 but remains sluggish. The OECD revised its 2024 GDP growth forecast for Germany down to 0.4% from an earlier estimate of 0.7%. Separately, the Ifo Institute cut its projection to 0.2% year-on-year growth, citing persistent infrastructure issues and weak performance in housing and automotive sectors.
Carsten Brzeski, global head of macro at ING, commented after Tuesday's vote, The debt brake is not "officially dead but buried alive. Germany has given up on leading the group of fiscal frugals in Europe for the sake of boosting its economy."
Opposition parties, including the far-right Alternative for Germany (AfD) and the far-left Die Linke, criticized the reforms, raising concerns over long-term debt burdens. Legal challenges attempting to block the vote were dismissed ahead of the parliamentary session.
Time pressure to pass the legislation was significant. The CDU, CSU, and SPD moved quickly, aiming to secure passage before the newly elected Bundestag convenes next week, where opposition parties will hold a larger share of seats and could have prevented the reforms' passage.
