Q&A: Germany's €500 bln infrastructure fund – What's in it for climate and energy?
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What is the fund’s purpose?
The fund was proposed by the conservative CDU/CSU alliance of likely next chancellor Friedrich Merz and the Social Democrats (SPD) of outgoing chancellor Olaf Scholz as a first result of the two parties’ exploratory coalition talks. Merz and SPD co-leader Lars Klingbeil presented the proposal, which rests on three pillars:
- Reforming Germany's constitutional limit on new governemnt borrowing, the so-called debt brake, also for the federal states to allow more borrowing
- A special fund for investing 500 billion euros in the country’s infrastructure over the coming 12 years, with 100 billion euros going to the states and 400 billion to the federal government
- Borrowing hundreds of billions of euros to reinforce Germany’s military, by only applying the debt brake to security expenditures of up to one percent of national GDP – rendering the budget theoretically unlimited
The debt brake had confined the outgoing government’s ability to respond to a range of challenges. The SPD and the Green Party both had campaigned for a reform of the rule, while CDU/CSU had ruled out changes to the constitutionally enshrined limit in its campaign.
However, Merz argued after the elections that the changed international environment had made a new approach necessary. Particularly the new U.S. administration’s wavering support for Ukraine in its resistance to Russia’s invasion meant that Germany must do “whatever it takes” to ensure that the country and its European partners can take defence into their own hands, he said. To this end, he proposed to suspend the debt brake for security expenditures beyond the threshold of one percent of GDP (equal to roughly 44 billion euros), effectively removing the ceiling on defence spending.
In addition, the prospective government proposed the 500-billion-euro special fund for infrastructure (equal to investments of more than 6,000 euros for each of Germany’s roughly 83 million inhabitants) to bolster civil protection, transport, hospitals, energy, education, science, research and development, care and digitalisation over a period of twelve years. By classifying it as a special fund (“Sondervermögen”), it would be exempt from debt brake rules.
The investments under the special fund have a runtime of twelve years, meaning the federal government and the states on average will have an additional 42 billion euros per year to spend. In 2024, total federal expenditures stood at 465 billion euros.
Who oversees the money’s allocation?
Special funds are generally subject to control by parliament and the Court of Auditors (Bundesrechnungshof). As ring-fenced funds dedicated to a specific purpose, they have a clearly defined runtime and thus offer a high degree of planning security for recipients.
Since changing the debt brake and setting up a special fund both require changes to the constitution, the deal needs two-thirds majority support in parliament. And since it would also affect the funding of federal states, it also requires the same majority in the Bundesrat, the council of state governments.
In the newly elected parliament that convenes for the first time on 25 March, the far-right Alternative for Germany (AfD) and the Left Party together have a blocking minority that could hinder changes to the constitution. While the Left Party opposes higher defence spending, the AfD has said it rejects both the special fund and changes to the debt brake. Merz’s CDU/CSU and the SPD therefore have said they want to secure a majority still in the “old” parliament, which continues to operate in full legal capacity until the new one has constituted itself. For this, they depend on support from the Green Party, which generally approves most of the stated aims of the special fund and higher defence spending. The AfD and the Left Party have both filed legal complaints against this course of action, but the court rejected their last-minute appeals.
The CDU/CSU and the SPD submitted a first draft of the law to parliament on 13 March, the same day the two camps opened their coalition negotiations. An agreement in parliament could be reached by 18 March, a goal that has come into close reach after Merz secured an agreement with the Greens on 14 March to dedicate a fifth of the sum to climate action. 100 billion euros of the sum could thus go to the country’s Climate and Transformation Fund (KTF), which is dedicated to climate policy spending. The KTF played a central role in the outgoing government’s collapse, as a constitutional court ruling 2023 found it to be filled with unlawfully booked funds due to the debt brake.
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 debt brake, which stipulates that new debt must not exceed 0.35 percent of GDP to allow for necessary investments as Germany’s economy moves towards climate neutrality. Polls carried out after the announcement showed that most supporters of all parties in parliament are in favour of the infrastructure fund, especially those of the CDU/CSU, the SPD and the Greens.
Where will the money come from eventually?
To raise the money for filling the special fund, Germany must rely on issuing state bonds. Investors, such as banks, insurance firms or investment funds, would then be able to purchase these bonds on the international market, where Germany continues to enjoy an excellent credit rating. But economists and others warn that the debt will need to be repaid eventually, requiring savings elsewhere.
Clemens Fuest, head of the economic research institute ifo, told public broadcaster ARD that 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, arguing that the country still lacked a solid strategy for what the funds should be spent on. She argued in tabloid Bild 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 the 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, news magazine Der Spiegel reported. 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 and thus diminishing the core budget’s flexibility further.
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?
Despite Merz's promise to dedicate 100 billion to climat-related measures, details on what the infrastructure funding would be used for have so far been sorely lacking. The parliamentary groups of the conservative alliance and the SPD merely stated in the draft document shared by Table.Media said that “additional investment in infrastructure is required, including in the areas of decarbonisation, transport and education.” The first announcements emerging from the exploratory talks between the CDU/CSU and the SPD on a possible coalition government so far are the only clear indicators of what the parties plan to do with the money. In a joint document, the prospective coalition partners merely said that the 500-billion-euro fund would be used for “getting our country back into shape” by investing in roads, railways, education, digitalisation, energy and healthcare.
The Green Party 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. A group of Green state politicians underlined their parliamentary group’s position in a joint position paper. Mona Neubaur, economy minister of North Rhine-Westphalia, Danyal Bayaz, finance minister of Baden-Wurttemberg, and Björn Fecker, finance senator in the city state Bremen, said their consent to the plans in the council of state governments would be conditional on ensuring that the package does not replace defence spending and infrastructure investments from the core budget. 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, they added.
Measures that could be financed with the special fund, such as building modernisation, grid expansion or hydrogen infrastructure, could thus 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.
CDU leader Merz reportedly said that the debt brake could be lifted for investments in civil protection, which could include costly climate adaptation measures. Details could then be decided in a separate law that the new parliament could decide with simple majority – and thus without depending on the Green Party’s consent. The Greens want to prevent the CDU/CSU alliance from using the new financial leeway to fund costly election promises, for example the CSU’s initiative to re-introduce subsidies for diesel fuel in the agricultural sector.
A network of proponents of more ambitious climate policies within the SPD has weighed in on the coalition talks between their party and the conservative CDU/CSU alliance under Friedrich Merz, warning that a possible new coalition government muss remain steadfast on emissions reduction and the energy transition. Measures they called for included 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.
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.
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.
How will the plans affect the EU?
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.
