Q&A: Germany's new €500 bln fund - What's in it for climate and energy?

1. What is the fund’s purpose?

2. Who oversees the money’s allocation?

3. Where will the money come from eventually?

4. What role do climate and energy play here?

5. Who has already laid claims to the money?

6. How will the plans affect the EU?

7. One-off debt brake solution, or permanent reform?

Where will the money come from eventually?

To raise the money for the fund, Germany relies on issuing government bonds. Investors, such as banks, insurance firms or investment funds, purchase these papers on the global financial markets, where Germany continues to enjoy an excellent credit rating. However, the rating reflects Germany's perceived ability to repay these loans, which in turn depends on Germany's long-term growth prospects and many other factors. Economists have already warned that the debt will need to be repaid eventually, requiring savings elsewhere.

Merz said before the final vote in the Council of States that the new debt meant that Germany must "count the cash", and reconsider its priorities regarding welfare spending and other areas. "Everything needs to be examined," Merz said, citing costs resulting from Germany's heating law, benefit payments, and migration as areas where savings could be made. "We're facing some tough decisions" to make room for infrastucture investments and reviving the economy, he added.

Germany's economy ministry (BMWK) forecast in mid-March that the country's economic stagnation of the past two years persisted in early 2025. However, the plans debated by the prospective coalition government could have "stabilising effects and increase planning security for households and companies," the ministry added.

The association of energy-intensive businesses (VIK) said the future government needed to bolster Germany’s industry, whose output has dropped 10 percent overall and even 20 percent for energy-intensive companies over the past two years. “In light of the planned massive increase of state debt, everything needs to be done to ensure economic growth,” VIK said. Lower energy costs, safe framework conditions and cutting red tape needed to move ahead, the lobby group argued.

Clemens Fuest, head of the economic research institute Ifo, said the special fund must be accompanied by austerity measures in other areas. “Cuts are necessary for non-priority items,” he argued, warning against using the freshly borrowed money for financing tasks that should already be covered by the core budget or to “distribute gifts and benefits” to voters. “It needs to be ensured that this new debt goes into additional investments and additional defence spending.”

Economist Veronika Grimm, member of the government’s council of economic advisors (Wirtschaftsweise), rejected what she described as throwing money at the challenges ahead. She argued that the country still lacked a solid strategy for what the funds should be spent on, adding that taking on new debt should only be done in lockstep with cuts to social and welfare spending. Friedrich Heinemann, economist at research institute ZEW, also warned against fiscal profligacy, arguing that Germany’s access to cheap interest rates and solid credit ratings are put in jeopardy if there is no sound plan for balancing expenditures.

Germany’s Court of Auditors warned that the proposal entails “macroeconomic and social risks” and could only be a “short-term exit” for urgent challenges. The auditors said that “permanently funding the state’s core tasks outside of the actual revenues means living above one’s means,” which would ultimately translate into paying higher interest rates, thus further undermining core budget flexibility.

A group of civil society organisations, including environmental NGO Greenpeace, climate action umbrella group Klima Allianz and workers’ welfare association AWO, called on the prospective government parties to use the momentum for enforcing “a wealth tax on the super-rich”, and to ensure a fair cost distribution for financing public interests. “Since the super-rich have a massive impact on the climate, they are especially responsible for contributing to a socially just ecological modernisation of the country,” the group said. A more proportional taxation of “very large wealth” would be an important lever at a time when the state takes on significantly more debt to make necessary investments, they argued.

What role do climate and energy play here?

Details on what the fund would be used for have so far been sorely lacking. So far, it's only been decided that 100 billion euros of the fund will be transferred into Germany's so-called Climate and Transformation Fund (KTF), which is dedicated specifically to climate policy spending. The Green Party had made its consent to the proposal contingent on ensuring sufficient clarity that climate action and the transition to a sustainable economy will be a focus of the fund, thus ensuring that at least a fifth of the sum was earmarked for the existing climate fund.

With the changes, the constitution would allow 500 billion euros in debt through a special fund "for additional investments in infrastructure and for additional investments to achieve climate neutrality by 2045." Whether parts of the 400 billion euros which are not transferred into the KTF are also used for climate-related spending is up to the government and parliament to decide in the coming years. 

A group of Green state politicians said in a joint position paper that the states should receive a greater share of the money, since they are tasked with implementing costly measures, such as climate adaptation or heating grid modernisation.

Some infrastructure investments that could also be financed with the new special fund, such as building modernisations, railway upgrades, grid expansion or steps to establish a hydrogen infrastructure, could also be subsumed under the ‘climate action’ label. Business newspaper Handelsblatt reported that the CDU also mulled including support for heating sector decarbonisation and carbon storage solutions in the package.

Transport NGO VCD said the money must exclusively go into sustainable investments. “By no means should the money be used to build new roads or expand existing ones,” VCD said, arguing that this would push climate targets even further out of reach. Pointing at estimates of Germany’s emissions reduction path in the coming years, in which transport continues to be a major laggard, the NGO said the infrastructure fund must not become a hindrance for the sector’s decarbonisation. 

Spending details will have to be decided in the new parliament with a simple majority, thus no longer requiring Green Party consent. The Greens have warned that the CDU/CSU alliance could seek to use the new financial leeway to fund climate-damaging and costly election promises, for example the CSU’s initiative to re-introduce subsidies for diesel fuel in the agricultural sector.

A network of more ambitious climate action proponents within the SPD also insisted that the new coalition government muss remain steadfast on emissions reduction and the energy transition. The network called for financial relief for municipalities that have to implement climate policies, as well as a far-reaching reform of the debt brake to permanently ease climate investments, among other measures.

Which climate and energy actors have already laid claims to the money?

The large pot of money that the CDU/CSU and the SPD plan to open immediately whetted appetites across society, sparking calls for better transport infrastructure funding, company support, better public services, and more. The German taxpayers’ association warned the parties not to turn the special fund into a “self-service shop” once the “floodgates have been opened” and large sums of money become available. Association head Reiner Holznagel said there was a risk that a lot of unnecessary projects would be launched in the special fund’s wake, as the plans would no longer be subjected to rigorous financial vetting.

• National railway company Deutsche Bahn has laid claim to almost one-third of the sum, arguing it needs 150 billion euros until 2034 in addition to 140 billion euros from the regular budget to adequately fund its rail network and train fleet overhaul.
• Offshore wind energy group BWO said parts of the funds should be directed at modernising and expanding the country’s seaports to ensure a smooth expansion of onshore wind power, while also increasing security at sea.
• Farmer's association DBV said that "infrastructure in rural areas, the agriculture sector and the transformation of livestock farming must be considered in the investments."
• Germany’s leading technical inspection and certification service provider, TÜV, said "investments in climate action, green tech, e-mobility and renewables will serve as a stimulus programme for the economy and make Germany more independent of imports." TÜV, which also oversees the licensing of many infrastructure projects, also said ramping up Germany's ageing transport infrastructure must be a priority when spending the money, adding that "it needs to be acknowledged that mobility is currently changing significantly," and that cars are no longer the first choice for many citizens.
• Utility association BDEW, said that the fund primarily had to ensure that “the economy is strengthened and that climate action and resilience are reconciled.” The lobby group added that enormous investments in energy grids have been necessary for years, and that policymakers would have to ensure that the country’s water infrastructure is fit for dealing with climate change. It also said that spending on the safety of energy infrastructure should also be covered by the infrastructure and security package.
• Utility association VKU said that while the special fund offered a much-needed impetus in many sectors, its earmarked climate spending would not be sufficient. "We'll need 721 billion euros for the energy transition until 2030 alone and an additional 800 billion euros for the maintenance and adaptation to climate change of the water and waste water infrastructure until 2045," VKU said.

How will the plans affect the EU?

Neighbouring countries have in the past criticised German state spending that benefits mostly the country's businesses, while poorer member states lack the financial means to do the same for their companies, for example during the pandemic or the energy crisis.

However, a massive boost to infrastructure spending in its largest and centrally located economy could have significant knock-on effects for the rest of the EU, observers have said. This is due to expected improvements in transport linkages across the country and to rising demand for goods and services from European neighbours that go into the infrastructure overhaul.

In a first market reaction to the prospective coalition partners’ announcement in early March, the euro surged against the U.S. dollar. This indicated growing investor confidence that the German spending plans could deliver a jolt to the entire eurozone, news site Politico reported.

Swiss bank UBS said that the plans “raise hopes for an economic lift” in Germany and the region. “It could also help offset potential headwinds to the eurozone economy in the event of higher tariffs from the U.S.,” UBS wrote. Goldman Sachs senior European economist Filippo Taddei told Reuters that the plans “will support growth and, in particular, will support European manufacturers at a time when they are particularly struggling.”

The special fund is likely to also affect spending under the EU’s Clean Industrial Deal, which the European Commission tabled earlier this year to boost competitiveness and support decarbonisation efforts in Europe. The deal addresses challenges faced by traditional, energy-intensive industries and clean tech sectors to help them compete in international markets and help reach the EU's climate goals.

One-off debt brake solution, or permanent reform?

Many stakeholders, including the government’s economic advisors, industry representatives, the federal states, civil society groups and also most citizens are in favour of fundamentally reforming the debt brake. However, the future coalitions' plans so far stop short of an outright reform, as they mainly constitute a workaround without fundamentally changing the debt limits. The debt brake can already be suspended if parliament declares an emergency situation, as was the case during the coronavirus pandemic.

Critics of the plan tabled by the CDU/CSU and the SPD say that the initiative does not address a long-term adaptation of the debt rules, a move that is popular with the SPD, the Greens and the Left Party but highly controversial for parts of the CDU/CSU, which had campaigned heavily on its insistence on debt rules and the outgoing government’s inability to balance the budget without borrowing new money.

However, public broadcaster DLF reported that Germany’s central bank, the Bundesbank, is already working on a concept for modifying the debt brake. The limit for new credit could be raised to 1.4 percent of GDP, provided that the national debt quote remains below a threshold of 60 percent.