Historic German spending package gets final approval, clears path for Merz’s coalition government

Germany’s major spending package that contains a reform of the country’s debt brake and hundreds of billions of euros of investments in defence, infrastructure and climate action has cleared the last hurdle, as the Council of Federal States (Bundesrat) greenlighted the law proposed by the prospective coalition government of the conservative alliance of the Christian Democrat Union (CDU) and Christian Social Union (CSU) together with the Social Democrats (SPD). With 53 out of the 69 votes in the council, the proposal gained seven votes more than what would have been necessary to achieve the required two-thirds majority, public broadcaster ARD reported. Four of the 16 federal states - Brandenburg, Saxony-Anhalt, Thuringia and Rhineland-Palatinate - abstained from the vote, while the remaining states all consented to the package.

After the German parliament (Bundestag) adopted the package on Tuesday (18 March), the vote in the Bundesrat cleared the way for a key instrument of the likely next government coalition under conservative leader Friedrich Merz as chancellor. The package contains a special fund worth 500 billion euros earmarked for additional investments in infrastructure and climate neutrality, as well as changes to the constitutional limit on government borrowing (the debt brake) to allow greater leeway for the federal government’s defence budget and for the country’s 16 state governments.

Merz’s proposal was expected to clear this second hurdle after the CDU leader agreed on a deal with the Green Party at the end of the previous week, which stipulated that at least one-fifth of the 500-billion-euro special fund is reserved for climate action and put the national target of achieving climate neutrality by 2045 into the constitution. Winfried Kretschmann, influential Green Party state premier from Baden-Wurttemberg, said that while his state agreed to the necessary step, he would do so with “a significant feeling of disturbance” due to the fast pace at which the prospective CDU/CSU-SPD coalition government pushed the package through the legislative process, news station ntv reported.

However, the vote also hinged on support from other parties, including the Free Voters in Bavaria. The party’s leader, Bavarian economy minister Hubert Aiwanger, who had initially rejected the spending package, said he ultimately consented to the proposal as his party otherwise likely would have been ejected from Bavaria’s coalition government together with the conservative CSU. “Demanding a sensible use of the funds is still better than saying I failed to prevent this,” Aiwanger argued in an article carried by news magazine Der Spiegel.

The special fund, the changes to the debt brake and the effective removal of a ceiling on defence spending mark a monumental shift in Germany’s fiscal policy, which in the past years had been pivoted on financial discipline. The package is expected to provide a major stimulus to the country’s ailing economy and also to the European economy as a whole if the funds are used prudently and not to replace spending otherwise coming from the core budget. It also removes a major obstacle to Merz’s chancellorship, as the CDU leader can now bank on a sound financial foundation for the coalition treaty his party aims to sign with the SPD by Easter.