Berlin
CNN
—
The German chancellor-in-waiting, Friedrich Merz, has won a vote in parliament to allow a huge increase in state borrowing that is set to super-charge the country’s military spending. The victory completes a Damascene conversion in German politics – using the outgoing parliamentary arithmetic.
After a week of wrangling with the Greens, who held out for some concessions from Merz on how the money would be spent, the vote in the recalled parliament Tuesday saw him secure the two-thirds majority needed to change Germany’s constitutional “debt brake” – a mechanism to limit government borrowing.
The policy U-turn is Merz’s attempt to achieve a number of goals: generate fresh winds for an economy stuck in the doldrums, super-charge military spending and inject much-needed cash into Germany’s aging infrastructure.
Merz won the vote on the relevant law by 513 to 207. His victory means any defense spending and certain security-related outlays that exceed 1% of gross domestic product will be exempt from the debt brake. It will also enable usually fiscally conservative Germany to create a €500 billion ($545 billion) fund for infrastructure.
Robin Winkler, a senior economist at Deutsche Bank, called the debt overhaul “a historic fiscal regime shift, arguably the largest since German reunification.” But he added that the onus was now on the incoming government to deliver the structural reforms needed to turn the stimulus into sustainable economic growth.
Before the vote, Carsten Brzeski, a senior economist at pan-European bank ING, told CNN that changing Germany’s debt brake would also have implications beyond its borders. “Germany, the guardian of fiscal austerity in Europe, is opening up its wallet,” he said, noting that “this idea of fiscal discipline needed in Europe is quickly fading away.”
The debt brake, enshrined in the constitution, was brought in by Angela Merkel in her first term as German chancellor, back in 2009. Nations across the world were reeling from the global financial crisis, having spent billions bailing out financial institutions.
The German policy was to grow in prominence in the years following the eurozone debt crisis.
“The debt brake was a fantastic instrument to lead by example in Europe: preaching austerity to all the other countries – Greece, Italy and Spain – and at the same time showing that Germany was leading the way with these very restrictive fiscal policies,” Brzeski explained.
There is “no exact number” on what Merz’s government could spend on defense, he noted.
But one model he provided to CNN, based on Germany spending 3.5% of GDP over the next 10 years, could unlock €600 billion.
For a country that has for decades been very self-conscious about its militarized past, the potential increase in defense spending marks a sea change.
Merz seized on his election victory to pass the reform, spurred on by fears sweeping Europe over the Trump administration’s apparent wavering on security commitments to allies.
Yet the idea is not Merz’s own. He is giving renewed impetus to a 2022 German security policy change dubbed Zeitenwende – “a turning point” in English – initiated by outgoing Chancellor Olaf Scholz just after Russia’s full-scale invasion of Ukraine.
Sudha David-Wilp, a senior fellow at the German Marshall Fund of the United States, a think tank, said Scholz’s implementation of the policy was hindered by his squabbling coalition.
Now, she told CNN, “Merz and (his) coalition need to accelerate this, not because Germany needs to be a military power but because Germany, with its European partners, needs to look at hard security, because it’s a different world.”
The debt brake also became a straitjacket for the German economy, Brzeski said, describing it as “one of the more structural root causes of the current stagnation” and comparing it to trying to accelerate a car with the handbrake on.
“A debt brake still makes sense if you have a nice, thriving economy,” he said, adding that politicians had realized that, as Germany’s economic growth had slowed, the mechanism was no longer working to the country’s advantage.
The shadow of US President Donald Trump has also hung over Tuesday’s vote. Speaking as it became clear Merz’s party had come out on top in last month’s federal election, Merz, known for his strong trans-Atlantic values, said his priority was to strengthen Europe as fast as possible “so that step by step we can really achieve independence from the USA.”
After Trump’s comments the previous week, he added, it was clear that “Americans in this administration are largely indifferent to the fate of Europe.”
The law on the debt brake reform now needs to be approved by the upper house of Germany’s parliament, also with a two-thirds majority, which Merz looks to have secured.
According to David-Wilp at the German Marshall Fund of the United States, Merz sees a need for Germany to lead on defense in Europe because “things have really undergone major change since (Trump’s) inauguration.”
During a debate Tuesday ahead of the vote, Merz said there had been a “paradigm shift” in Germany’s defense policy. Time will tell if more lavish spending will boost the country’s security and fundamentally change its military.
Claudia Otto contributed to this report.
