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Germany’s Military Spending Plans in Doubt After Rise of AfD and Left Parties
Germany’s Military Spending Plans in Doubt After Rise of AfD and Left Parties ·Bloomberg
Alexander Weber and Kamil Kowalcze
5 min read
(Bloomberg) -- Friedrich Merz’s plans to ramp up defense spending in Germany have hit an early obstacle after a surge in support for fringe parties left him potentially locked into strict restrictions on government borrowing.
The combination of a narrower-than-expected victory for his conservative bloc and poor showings from the Social Democrats and Greens means that the three mainstream groups in the new parliament will be short of the necessary votes to revise the so-called debt brake enshrined in the constitution.
“At a time when it is crucial to raise spending for the military and Ukraine and ease the tax burden for workers and firms, Germany may struggle to find the fiscal space to do so,” Berenberg Chief Economist Holger Schmieding said. “A failure to ramp up military spending could get Germany into deep trouble with its NATO partners. By infuriating US President Donald Trump, it could also add to the risk of a US-EU trade war.”
Beyond military outlays, Merz has signaled his priority is to cut spending and lower taxes. Yet economists have said such measures won’t create the kind of fiscal space necessary to modernize Germany’s aging infrastructure and boost defense spending.
The far-right Alternative for Germany wants to stick to the country’s strict debt framework, which limits budget shortfalls to 0.35% of gross domestic product, with leader Alice Weidel on Monday doubling down on her disapproval of any loosening.
“Merz will relax the debt brake,” she told reporters in Berlin. “That is exactly the opposite of what this country needs.”
The AfD’s opposition puts onus for any changes on the Left party, which is in favor of ditching the debt brake, but also wants to lower the defense budget and opposes Merz’s platform on many other issues, including taxation and migration.
“We were against the introduction of the debt brake from the outset,” the Left’s co-leader Heidi Reichinnek said on Monday. “We are pleased that there is movement here. The federal government will also have to move, Friedrich Merz will have to bite the bullet. We will only vote under certain conditions, only if investments are made in infrastructure.”
Analysts at Deutsche Bank AG see scope for a compromise in parliament.
“Theoretically, there could therefore be a cross-party consensus with the Left on setting up an off-budget infrastructure fund or exempting infrastructure investment from the debt brake to create more room for defense spending in the core budget,” economists Marion Muehlberger and Robin Winkler said. “This would probably still constrain the extent of additional defense expenditure in the next term, but it would at least create some room for maneuver.”
The Social Democrats — who together with the Green campaigned for relaxing fiscal rules — on Monday appeared open to such an approach.
“The financing of future tasks — from infrastructure to digitalization and security — will be of central importance,” SPD budget lawmaker Andreas Schwarz said. “A reform of the debt brake will be unavoidable. A democratic majority will be found for this. There will certainly also have to be talks with the Greens and the Left, who will certainly also want to put forward proposals.”
The Greens themselves on Monday suggested that it might be worth reconvening the outgoing parliament on the debt brake before the new one meets, though Vice Chancellor Robert Habeck said it would be up to Merz to make such a call.
What Bloomberg Economics Says...
“If a reform of the debt brake is not possible, then the new chancellor could ask again parliament to temporarily suspend the rule to allow for higher spending. A key risk to watch in such a scenario would then be any lawsuits before the country’s Federal Constitutional Court. While it is hard to predict how the court would react, it might be more amenable to allow for an emergency suspension, particularly given the rising geopolitical challenges.”
—Antonio Barroso and Martin Ademmer. For full react, click here
For 2025, a Merz administration could agree to suspend the limit again on the basis of an emergency situation, possibly due to war in Ukraine. A simple majority in parliament would be sufficient for such a step.
Such suspensions were in place during the pandemic and the energy crisis to allow the government to dish out aid to companies and households. Failed discussions over whether how to meet the target again were key to the collapse of Olaf Scholz’s government.
Critics argue that the rule, which was agreed after the 2008 financial crisis, has contributed to underinvestment in infrastructure like roads and digital technologies. It’s also blamed for playing a role in the weak performance of the German economy since the pandemic, which was a key topic during the election campaign.
Bundesbank President Joachim Nagel said this month that his institution will present a proposal on how to reform the debt brake after the election, arguing there’s “room to maneuver.” The government’s Council of Economic Experts has also put forward ideas on what should be changed.
But without a constitutional majority, Germany’s next administration may have to find other sources of funding. That could include cuts to welfare spending, getting rid of subsidies and injecting equity into state-adjacent companies so that they can borrow more.
Other ways to ramp up military spending may yet come to pass. Work is underway at the EU level to find the necessary wiggle room in the bloc’s fiscal framework. There’s also talk of joint financing, which is becoming a realistic option for a growing list of leaders.
“All of this raises the chance that we will get some EU-wide approach to raising military spending because new EU-wide debt would fall most likely out of the debt brake,” Goldman Sachs Chief European Economist Jari Stehn told Bloomberg Television on Monday.
--With assistance from Michael Nienaber, Arne Delfs, Angela Cullen, Iain Rogers, Anna Edwards, Kriti Gupta, Lizzy Burden and Karin Matussek.
