The German Bundestag just made a historic decision today. A decision that will finally break Germany’s debt brake.
This policy has been in place since 2009 and has helped reduce the country’s public debt over the past 10 years or so.
At the same time when other countries like the US and UK are still struggling with elevated debt.
As of today however, this change, which is driven by defence needs and economic stagnation, opens the door to €500 billion in new infrastructure spending over the next decade.
It also signals a departure from a decades-old economic doctrine that prioritized debt reduction above all else.
Why Germany’s debt brake mattered for so long
Germany’s debt brake capped federal borrowing at just 0.35% of GDP annually, with exceptions only for crises like recessions or natural disasters.
It was a product of the post-2008 financial crisis era, born from fears of spiralling deficits and inflation.
But its origins go deeper. Germany’s aversion to debt is tied to historical episodes, particularly the Weimar Republic hyperinflation of the 1920s and the borrowing surge after reunification in the 1990s.
Both events have left deep political scars.
This fiscal restraint became a point of national pride. By 2020, Germany had significantly reduced its debt ratio, while countries like the US and UK saw theirs climb.
The Bundesbank and many German politicians regarded the debt brake as essential to maintaining financial stability and global credibility.
But this fiscal conservatism has also constrained government investment in critical infrastructure over the years.
Roads, railways, and digital infrastructure are some examples of where Germany is being criticised for lagging.
Additionally, military spending remained below NATO’s 2% GDP target, something that soon is about to change.
Why did it break now?
Pressure to rethink the debt brake has been building for years. Germany’s net public investment has been negative for over 25 years, holding back growth.
Key sectors like transportation, digital infrastructure, and defence have seen chronic underfunding.
In 2024, the German Institute for Economic Research reported that public capital stock was deteriorating at a rate not seen since the 1980s.
The catalyst for change came from abroad. With Donald Trump back in the White House and openly questioning NATO commitments, Germany faced the prospect of reduced American security support.
German lawmakers argued that without U.S. protection, Europe’s largest economy needed to invest more in its defence.
The situation was further aggravated by economic stagnation. Germany’s GDP contracted 0.3% in 2024, the second consecutive year of decline.
Business leaders and economists alike warned that without large-scale investment, Germany’s industrial base risked falling behind global competitors.
Even the Bundesbank, historically opposed to deficit spending, acknowledged that government investment was urgently needed.
What was voted and why it matters
On March 18, the Bundestag approved a constitutional amendment with 513 votes in favour and 207 against, surpassing the two-thirds majority required.
The package includes a €500 billion infrastructure fund over 12 years and exempts all defence spending above 1% of GDP (roughly €45 billion) from debt limits.
Additionally, German states are now allowed to borrow up to 0.35% of their GDP annually.
This is a big move for Germany.
For the first time, the country will fund large-scale public investments with long-term debt outside the regular budget.
The package earmarks €100 billion for climate initiatives and €100 billion for state-level projects.
The rest will go to railways, roads, bridges, schools, and hospitals. Those are the defined areas where underinvestment has been most severe.
In terms of defence spending, instead of relying on American-made weapons, Germany will now prioritize European manufacturers.
Planned purchases include six F127 battleships from Thyssenkrupp Marine Systems (valued at over €15 billion) and 20 Eurofighter jets from the BAE-Airbus-Leonardo partnership (worth €3 billion).
In comparison, Germany’s defence fund which was approved in 2022 favoured US firms like Lockheed Martin and Boeing.
What comes next?
The next hurdle is the Bundesrat, Germany’s upper house, which must also approve the constitutional change with a two-thirds majority.
A vote is scheduled for Friday.
Given the support from Bavaria’s CSU and other key states, passage is likely, but not guaranteed.
Legal challenges are already looming. The far-right AfD and other fiscal conservatives argue that the reform undermines democratic oversight and risks unsustainable debt levels.
Courts have so far allowed the legislative process to proceed, but the issue could remain contested for months.
Beyond legal battles, the real question is execution. Germany’s public sector has long struggled with project delivery.
Regulatory hurdles, bureaucratic delays, and political infighting could dilute the impact of new spending.
The DIHK (German Chamber of Commerce) has warned that unless the funds are used efficiently, rising debt service costs could outweigh the benefits.
Will this change Europe’s economic direction?
Germany’s decision has broader implications.
For the past years, the EU’s fiscal rules which were influenced by German policies, have limited borrowing across the bloc.
Loosening the debt brake at home could soften Germany’s stance on EU-wide spending limits, especially as France, Italy, and others push for greater budgetary flexibility.
It also raises the stakes for European defence.
By choosing to spend big on European weapons and military infrastructure, Germany is effectively betting on a more autonomous European security strategy.
This could reshape NATO dynamics and shift the balance in Europe’s defence industry, where US firms still dominate.
Most importantly, the reform indicates that Germany is willing to prioritize growth and security over debt reduction, a significant departure from its post-crisis orthodoxy.
Investors are already feeling optimistic about future growth, evident by the DAX 30 index rising by 0.98% over the day of the announcement.
The index even briefly reached its all-time high during the trading day.
However, whether this shift leads to sustained economic recovery or fiscal instability will depend on how well Berlin manages the influx of new debt, and whether it delivers real improvements on the ground.
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