Unlock stock picks and a broker-level newsfeed that powers Wall Street.Upgrade Now
Germany Abandons Fiscal Shackles to Transform Europe’s Defenses
Germany Abandons Fiscal Shackles to Transform Europe’s Defenses ·Bloomberg
Arne Delfs and Christoph Rauwald
5 min read
(Bloomberg) -- Germany will unlock hundreds of billions of euros for defense and infrastructure investments in a dramatic shift that upends its ironclad controls on government borrowing.
Chancellor-in-waiting Friedrich Merz said on Tuesday night that Germany would amend the constitution to exempt defense and security outlays from limits on fiscal spending to do “whatever it takes” to defend the country. He said that the main center parties had also agreed to launch a €500 billion ($528 billion) infrastructure fund to invest in priorities such as transportation, energy grids and housing.
“Europe needs to strengthen defense,” said Merz, whose CDU/CSU alliance finished first in a federal election just over a week ago. “The necessary decisions, especially with regard to the federal budget, can no longer be postponed after the recent choices of the American government.”
European countries need to mobilize trillions of euros in additional defense funds to counter the threat of Russian aggression as the US looks set to pare back its security presence on the continent. President Donald Trump ordered a pause to all military aid to Ukraine, shifting a massive burden on Kyiv’s European allies.
The euro surged to around $1.06, the highest since Dec. 6, after the announcement. That put it on course for its largest two-day gain since late 2022 as investors bet the increased spending by Germany and others will boost the European economy.
Meanwhile, German bond futures fell to their lowest since June last year as traders eyed greater issuance. The moves followed the end of the European trading session, with lower liquidity potentially exacerbating the moves.
The German decision throws down a challenge to the EU’s other 26 members before they gather on Thursday to discuss how to ramp up military spending across the bloc. With Berlin typically a powerful voice against increased outlays, the announcement is a game-changer for European defense.
The EU responded to Trump’s aid halt by proposing €150 billion in loans to boost defense spending. After decades of underinvestment, European Commission President Ursula von der Leyen said that the EU also plans to activate a mechanism that would allow countries to use their national budgets to spend an additional €650 billion on defense over four years without triggering budgetary penalties.
“Politicians have understood that swift and decisive action must be taken now,” Christiane Benner, the chairwoman of Germany’s largest labor union IG Metall said in a statement. “The speed and determination of the exploratory parties bodes well for the near future,” she said. IG Metall represents just over two million workers in Germany’s critical industry and metals sector.
The parties are racing to push through a vote on the changes before the new legislature begins meeting three weeks from now because they likely won’t have the needed two-thirds majority in the new parliament.
The package tackles several urgent challenges that are awaiting the next chancellor: it sends a message to Moscow and Washington that Germany is serious about European defense, and it could potentially deliver a jolt to the country’s struggling economy, which has barely grown for the past two years.
Just over a week after Merz’s party won the election, his Christian Democratic-led bloc and the rival Social Democrats are proceeding on key policy items rather than wait out a months-long process to form a governing coalition.
Merz, who is expected to succeed Chancellor Olaf Scholz, moved forward with negotiations days after the Feb. 23 election win. Merz said earlier this week that he would aim to clinch a deal with the SPD on boosting defense spending before European Union leaders meet in Brussels on Thursday.
“Just what the doctor ordered,” said Sander Tordoir, chief economist of the Centre for European Reform, a think tank. “The one player that can step in to rekindle demand is the government. Germany has the fiscal space to do it and is now doing it.”
Europe’s biggest economy faces a barrage of challenges. After two years of stagnation the economic outlook for 2025 remains muted and Trump is following through on promises to shake up international trade and challenge traditional alliances.
The US leader imposed tariffs on Canada, Mexico and China — and has threatened to hit the EU as well. At the same time, he ordered a halt to all US military aid to Ukraine, throwing the support of Ukraine’s most powerful ally into doubt.
Bolstering Germany’s abilities to defend itself and support NATO allies has become more urgent following Ukrainian President Volodymyr Zelenskiy’s clash with Trump at the White House Friday.
“We have the responsibility to invest in a strong and secure Europe, perhaps the most important task of my political generation,” SPD leader Lars Klingbeil said. “And looking at the White House and what happened there last Friday with President Zelenskiy, it has become clear that we need much more money for defense and security in Europe.”
Over the weekend, leaders from across Europe, including Scholz, gathered in London to discuss new pledges for military investment and reiterated their ongoing support for Ukraine in its defense against Russia’s invasion.
Merz has said that he wants to form a government by mid-April. Unlike in the US or UK, parties in Germany usually need to team up with another group to form a coalition that has a parliamentary majority. Those talks can drag on until party negotiators agree on a joint policy platform.
“We know we need to do more,” Merz said. “Europe needs to grow up and Europe needs to be able to defend itself.”
--With assistance from Greg Ritchie, Zoe Schneeweiss, Naomi Kresge, Christoph Rauwald, Chad Thomas, Libby Cherry and Alexander Weber.
(Updates markets in the fifth paragraph, additional details throughout.)
