Germany's Coalition Partners Propose Loosening Debt Rules for Defense and Infrastructure Spending
The prospective partners in Germany's upcoming government have announced plans to ease borrowing rules to facilitate increased defense spending. Friedrich Merz, the center-right election winner, is aligning with the center-left Social Democrats, led by outgoing Chancellor Olaf Scholz, to advocate for a substantial €500 billion ($533 billion) fund aimed at enhancing Germany's infrastructure over the next decade.
Merz stated that the coalition will propose exemptions for defense spending that exceeds 1% of gross domestic product (GDP) from the existing limits on governmental borrowing. He emphasized the urgent need for Germany and Europe to bolster their defense capabilities in light of rising threats. "It is clear to us that Europe—and, along with it, the Federal Republic of Germany—must now quickly make significant efforts to strengthen our country's defense," Merz declared at a press conference.
Acknowledging the importance of the United States as an ally, Merz highlighted that increased funding for defense is essential. He noted, "We are counting on the United States of America to honor our mutual alliance commitments in the future. However, we also recognize that the funding for our country's defense and our alliances must significantly expand."
The coalition plans to introduce legislation regarding the defense spending exemptions and the infrastructure package to the outgoing parliament next week. Merz also expressed support for an urgent €3 billion aid package for Ukraine, which had been delayed in parliament for weeks. He indicated that discussions with Scholz would address the immediate assistance required for Ukraine, estimating around €30 to €35 billion could be approved as off-budget expenditure.
In response to the full-scale Russian invasion of Ukraine in 2022, Chancellor Scholz previously committed to increasing Germany's defense spending to meet NATO's target of 2% of GDP. He announced the establishment of a dedicated €100 billion fund to modernize the military. However, this fund, which has allowed Germany to achieve the 2% target, is projected to be depleted by 2027, thereby intensifying the urgency to reinforce military and defense spending as the new U.S. administration emphasizes stronger transatlantic cooperation.
Germany's fiscal framework, known as the 'debt brake,' permits new borrowing of only 0.35% of annual GDP, though this limit can be suspended in exceptional situations. This suspension was last employed for a three-year period following the onset of the COVID-19 pandemic, enabling significant borrowing to fund various support and stimulus measures.
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