Likely next German govt parties agree debt rules bypass for defence and infrastructure, climate focus unclear
Germany’s likely next coalition government parties have reached a deal to unlock hundreds of billions of euros for both defence and infrastructure in sectors such as transport, hospitals, and energy through new debt by reforming the country’s state debt rules and introducing a special fund.
"Our country is running on wear and tear, and that is why it was important for us to invest, to invest massively, so that our country functions better again,” said Lars Klingbeil, co-leader of the Social Democrats (SPD). “A future government must stop the deterioration of our country," he said, adding that future defence spending “must not come at the expense of investments in the future viability of our country”.
Security and military spending are in the focus of the agreement: "In view of the threats to our freedom and peace on our continent, whatever it takes must now also apply to our defence," said Friedrich Merz, leader of the conservative Christian Democrat/Christian Social Union (CDU/CSU) alliance and likely next German chancellor. US president Donald Trump’s upending of decades of transatlantic relations and the wider geopolitical order has hastened the push to make big spending decisions.
Merz’s conservatives and the SPD of outgoing chancellor Olaf Scholz – who are in talks to form the next coalition government after last month’s snap election – want to change the constitution in the current legislative period, which ends in late March. The changes would have to be agreed by both legislative chambers, and require the support of lawmakers from the Green Party to reach the necessary two-thirds majority. Reaching such a majority once the new parliament is in place would be more difficult, since the far-right party Alternative for Germany (AfD) and the Left Party substantially increased their number of seats and are both critical of the plans, even if for different reasons.
If agreed in parliament, the reforms would mark a major shift in German spending policy, putting a higher priority on modernising infrastructure and military spending than on keeping within self-imposed borrowing limits. Economists have long called for a fundamental reform of the so-called debt brake, which stipulates that new debt must not exceed 0.35 percent of annual economic output, to allow for necessary investments as Germany’s economy moves towards climate neutrality.
Merz and his Conservatives during the election campaign had opposed the idea of taking on massive new debt and instead called for fiscal discipline and spending cuts.
Few details on deal without mention of climate
It is not clear whether Green Party lawmakers will agree to the proposals, although they are generally in favour of loosening debt limit rules to enable more spending on measures that further climate action. Party leaders criticised that they were not involved in the talks until now. Britta Haßelmann, co-head of the Greens’ parliamentary group, said that her party wants a long-term solution “and that in addition to the issue of security, investments in infrastructure, the economy and the climate are also addressed in a sustainable manner”.
The CDU/CSU alliance and the SPD agreed to exempt defence expenses beyond the threshold of one percent of GDP from the debt limit, effectively removing the ceiling for security spending. With a 500-billion-euro special fund for infrastructure the parties aim to fund investments in civil protection, transport, hospitals, energy, education, science, research and development, care, and digitalisation over a period of ten years. Of the total, 100 billion euros is for federal state spending, and the states get more leeway on their debt as well. The deal also requires a two-thirds majority in the Bundesrat, the council of state governments.
The one-page document laying out the agreement does not mention the challenges of climate change or the transition of Germany’s economy to climate neutrality, although it is likely that transport and energy infrastructure investments will include transition projects.
Asked about what the infrastructure spending will be used for, and whether it will support the transition to climate neutrality, a CDU spokesperson told Clean Energy Wire that it could not provide detailed information at this time.
NGO umbrella association DNR and several environmental NGOs welcomed the plans for a special fund as “an important signal for the modernisation and strengthening of public infrastructure in Germany.” However, every euro invested in bridges, buildings or railways “must be made on the premise that we are preserving our natural resources. Climate neutrality and the protection of our biodiversity must not just be ‘included’, but must be a self-evident and binding basis for all investments.”
Environmental NGO WWF Germany criticised that many questions remained unanswered after the deal's announcement. “Five hundred billion euros for infrastructure is a strong signal – but without the integration of climate protection and nature conservation, this plan lacks a decisive building block for securing a sustainable future – for future generations against the consequences of the climate and nature crisis,” it said.
Sascha Müller-Kraenner, executive director of NGO Environmental Action Germany (DUH), called on the Green Party to “not be swayed by empty patriotic appeals,” but “negotiate hard for more climate protection” for their consent to the constitutional reform.
Deal is a “game-changer” – economists
Economic researchers welcomed the agreement. "The result of the discussions on the special infrastructure fund and the reform of the debt brake is a real game-changer,” Sebastian Dullien, research director at the Macroeconomic Policy Institute, told Reuters. If the parties succeed, “the German economy's stagnation could soon be over. Not just because urgently needed investments will come, but also because the mood should shift dramatically”.
The deal is a sign that politics in Germany was “finally willing again to invest sustainably” in infrastructure, said Michael Hüther, director of the German Economic Institute (IW). He warned that a special fund must not mean that funds marked for infrastructure in the regular budget until now would then “reallocated for social purposes.”
IW said that the planned special fund could “unleash an investment boom in Germany.” According to IW model calculations, annual investments of 50 billion euros over ten years could increase total real investment by almost seven percent by 2034. Gross domestic product (GDP) would also be one percent higher in this scenario.
Municipal utilities association VKU also welcomed the deal. “The energy transition alone will require additional investments totalling around 721 billion euros by 2030 in order to achieve our climate targets,” said managing director Ingbert Liebing. “In addition, billions will need to be invested in water and wastewater infrastructure to make it climate-resilient.” He said he expected that the infrastructure funds would also be used for the energy transition.
Energy industry association BDEW highlighted several areas in need of funds. “Billions need to be invested in grid expansion. The expansion of controllable power plants must be made possible. Investments in grids, production plants and storage facilities are important prerequisites for the hydrogen ramp-up,” said BDEW head Kerstin Andreae. She added that every euro invested in infrastructure benefitted security of supply, competitiveness and climate neutrality plans, and that private capital was needed in addition to state funding.
Renewable energy industry association BEE president Simone Peter said that investments should prioritise energy transition infrastructure and digitalisation to improve Germany’s competitiveness and make reaching climate neutrality possible. “A climate-neutral business location requires efficient grids for renewable energies,” she said. A successful energy transition was “the only way to keep energy prices affordable in the long term and secure the supply.”
