Once upon a time there was the “locomotive of Europe”. Once upon a time Germany of Austerity and of balanced budget as a golden rule. A country that even in the face of the darkest crises that had brought down a host of superpowers had never wavered, remaining stable and firm on the foundations built after reunification. Then came the Covid pandemic, the Russian invasion of Ukraine, the economic recession and the resulting political crisis that led the country to early elections. But the straw that broke the camel's back came from overseas: the return of donald trump at the White House, which in a month and a half has already disrupted the world's political and economic structure.
At this point, German leaders, old and new, seem to have had an epiphany: to get out of the difficulties, Germany needs to rebuild itself. Once again. And the announcements made in recent weeks seem to want to go in this direction. One above all: the proposal by CDU and SPD, the two parties that will form the Grand Coalition on which the new Government will be based, to change the Constitution, modifying one of its most well-known laws: the debt brake, the debt brake which forces the country to maintain a balanced budget. And if we add to this Olaf Scholz's speech at the extraordinary European Council during which the outgoing Chancellor announced that he wanted change the Stability Pact too EU, the German revolution is served. It may not be the fall of the Berlin Wall, but from an economic-financial point of view it is very close. So much so that the next chancellor Friedrich Merz did not hesitate to define what is happening as the “whatever it takes” of Germany, paraphrasing the famous phrase of the then president of the ECB Mario Draghi from which the rescue of the euro started.
Germany focuses on infrastructure and rearmament
But what is the purpose of a change that for Berlin and for German politics as a whole is equivalent to an epochal turning point? To allow the country to invest hundreds of billions of euros in military spending and infrastructure.
In detail, CDU and SPD have announced their intention to set up a fund of well 500 billion euros. Money that will be spent over the next 10 years to renovate and enhance the German infrastructure, with impacts expected starting from 2026.
In parallel, after the U.S. about-face, which blocked military aid to Ukraine, and the clash between Donald Trump (and his vice president Vance) and Volodymyr Zelensky at the White House, the future Chancellor Merz and many other German leaders, together with their European counterparts, have understood that Europe cannot depend on the U.S. and must defend itself alone. For this reason, Germany has decided to increase defense spending to 3% of GDP.
The “debt brake” stumbling block
There is though a hurdle to overcome to turn the costly German plans into reality: the debt brake, a constitutional law passed in 2009 that requires the country to maintain a balanced budget, with a primary deficit limit of almost zero: 0,35% of GDP. For the Länder, however, structural deficits have been completely banned starting from 2020, except in the case of natural disasters or severe recessions. Simply put, despite Germany currently having a public debt equal to 63% of GDP (France is at 111%, Italy at 135%, to be clear), due to the debt brake cannot afford to deficit spend by increasing debt, even though it has the fiscal space to do so.
CDU and SPD's proposal on debt brake
And it is precisely in this context that the proposal of the two parties that will most likely form the new government fits in: the CDU of the new Chancellor Friedrich Merz and the SPD of the outgoing Chancellor Olaf Scholz. The plan is to do not apply the “debt brake” to military spending which exceed 1% of GDP, but also the 500 billion promised for infrastructure.
In numbers, if 1% of GDP is equal to 45 billion a year, just for rearmament we are talking about approximately 90 billion euros more that would be freed up every year, to which are added 50 billion a year for infrastructure.
There is, however, a key factor to consider: time. Since this is a constitutional amendment, to approve the reform a two-thirds majority. Unattainable numbers when the new parliament is established, considering that the far right AfD has already said it is against it and will count on 150 deputies. Scholz and Merz therefore aim to approve the proposal before the inauguration scheduled for the end of March. For this reason, they are already underway negotiations with the Greens, who were part of the outgoing traffic light coalition and who could give CDU and SPD the crutch they need to pass an epochal law.
