German policy overhaul Merz to revise debt terms to boost defense spending

Christian Democratic Union (CDU) leader Merz, who is expected to be the next German chancellor, said Germany will set up a 500 billion euro fund as part of a sweeping policy overhaul to address urgent investment needs in the defense sector.

According to Bloomberg and Agence France-Presse, Merz announced at a press conference on Tuesday (March 4) that the coalition government will submit proposals to parliament in the coming week to amend the "debt brake" clause in the German constitution to expand the scope of exemption for defense spending. He stressed that in the face of "dangers that threaten freedom and peace on our continent", Germany would "do everything" to improve its defence capabilities.

The plan marks a major shift in German defense policy. Germany has long been constrained by strict fiscal discipline and has avoided large increases in its defence budget, and Mr Merz has proposed excluding defence spending above 1 per cent of gross domestic product from the debt brake. At the current size of the German economy, that would be about 45 billion euros.

In addition, Merz proposed the creation of a special fund of 500 billion euros over 10 years for infrastructure investment. The Social Democrats have long pushed for this goal to boost the German economy, which is at risk of a third straight year of recession. Mr Merz plans to relax existing limits on state deficits, allowing states to borrow 0.35% of GDP.

Merz also said he hoped a 3 billion euro aid package for Ukraine would be approved soon. He noted that he would meet with outgoing Chancellor Scholz this week to approve the extrabudgetary spending as soon as possible.

Under Merz's plan, the coalition and the Social Democrats would complete the legislation before the end of the current parliament. In the current parliament, the Greens, together with the two parties, have the two-thirds majority needed to pass. Although the Greens are not involved in the new government formation talks, as a strong supporter of Ukraine and advocate of infrastructure investment, the Greens are likely to support the spending proposals. However, the Green party's parliamentary group co-chair, Delej, pointed out that the Green party will not "automatically support" the proposal and wants more climate protection measures added to the package.

But time is running out and the far-right Alternative for Germany (AfD) and far-left Die Linke could block Mr Merz's major fiscal reforms once the new parliament is formed.

German media have estimated that it could cost between 200 billion and 400 billion euros to upgrade the ill-equipped German military to a modern level. SPD negotiators have pointed out that this plan would increase the German defense budget to at least 100 billion euros a year.