The News
Germany’s likely next chancellor pledged to significantly increase the country’s defense and infrastructure spending, signaling a major shift in Berlin’s borrowing rules that could put pressure on other European Union countries to ramp up military spending across the bloc.
Friedrich Merz, whose center-right party won last month’s general election, announced a deal with his likely coalition partners to relax Berlin’s stringent borrowing rules to fund the investment.
SIGNALS
A big change for Germany, and for Merz
Merz’s announcement marked “a stunning shift in Germany’s traditionally conservative stance on fiscal stimulus,” The Financial Times wrote. While analysts have long urged Berlin to rethink its strict debt rules, that Merz — who campaigned as a fiscal conservative — has made this choice represents a “dizzying” about-face, a Handelsblatt columnist wrote. Deutsche Bank economists characterized the deal as “one of the most historic paradigm shifts in German postwar history,” while investors seemed wary: The yield on German 10-year bonds jumped the most since 2020 on the news.
Germany challenges other EU countries to boost defense spending
The agreement by Germany’s prospective coalition partners “throws down a challenge to the EU’s other 26 members,” Bloomberg wrote. The bloc, which is due to gather again on Thursday to discuss Ukraine and European security, has already ramped up efforts in light of Washington’s retreat: On Tuesday, the European Commission president unveiled a €800 billion plan to rearm Europe, hours after US President Donald Trump froze military aid to Ukraine. To accelerate those efforts, Europe could better finance its defense spending through more borrowing, the Kiel Institute, a German think tank, argued in a recent report: “Europe’s security should not be put at risk because of fiscal rules.”
Merz faces an uphill battle to get the deal passed
It remains unclear if Merz’s proposed debt brake deal will win the two-thirds majority in Germany’s Bundestag required to pass. “Merz will have to find a broad compromise far beyond the potential coalition with the SPD [the center-left party led by outgoing Chancellor Olaf Scholz],” UK-based think tank Chatham House wrote. Crucially, the Greens have declined to pledge their support, and have questioned why climate-friendly policies are not included. “The clock is ticking: At the end of the month, the new parliament will convene in which the far-right Alternative for Germany (AfD) and the far-left Die Linke will together be able to veto the sweeping changes Merz has proposed,” Le Monde wrote.