Bundestag OKs Major Changes to German Fiscal Policy

Described by some as a “game changer,” Germany’s parliament passed a spending package that breaks from decades of federal policy (Flickr)

Mere weeks after one of the most tumultuous and contentious elections in modern German history, a major political shakeup once again swept through Berlin with the passage of a €500 billion aid and stimulus package on February 18. 

The legislation is notable for a variety of reasons, not least of which are the massive sums it pours into climate, infrastructure, and defense. Robin Winkler, Chief German Economist at Deutsche Bank Research, described it as “…arguably the largest [fiscal regime shift] since German reunification.” In addition, analysts at Bank of America dubbed it a “…game changer for [Germany’s economic] outlook.” As CNBC notes, Germany has witnessed lackluster performance over the past few quarters, and there is optimism that the investments could spark new life into some of the country’s core industries. 

In addition to increased expenditures, the plan also makes constitutional alterations to the country’s so-called “debt brake.” The mechanism was first implemented in 2009 to strictly limit the size of budget deficits, per the New York Times. Germany has long been renowned for its fiscal conservatism, guiding both itself and several European counterparts through successive financial crises under a philosophy of austerity measures and tight purse strings. That, however, will soon change, with defense spending classified as exempt from the debt rules. As a result, federal and state governments will have wide latitude to finance defense-related investments through borrowing. 

Although Friedrich Merz—Germany’s (un)official Chancellor-in-waiting—and the center-right CDU party he leads spent much of the recent campaign cycle opposing the incursion of new debt, a convergence of rapidly evolving geopolitical crises convinced many lawmakers that policy shifts were warranted. As NPR reports, Merz has recently said that Germany must now do “whatever it takes” to bolster its military capabilities.  

With the war in Ukraine persisting, an increasingly aggressive Russia threatening NATO, and U.S. support for Europe in serious doubt, Germany is going all-in on defense. According to CNN, some estimates predict that the new legislation could amount to more than €600 billion over the next decade. The spending builds on outgoing Chancellor Olaf Scholz’s “Zeitenwende” (lit. turning point), a 2022 initiative that put a special focus on military investment and modernization. 

Perhaps most unusual, though, was the nature of the vote itself. Following the parliamentary elections on February 23, the Bundestag was in a lame-duck session, a typically unremarkable and unproductive period. Merz’s own CDU is set to gain seats once new members are sworn in. But sizable gains by far-right and far-left parties mean that there will be little room for the compromise needed to reach the 2/3rds majority that the constitutional changes mandate. As a result, Merz opted to recall the current Bundestag and reach a deal with the center-left SPD and the Greens. The latter assented after Merz agreed to significant climate change commitments, Politico notes. 

The measure must still gain approval from the Bundesrat—Germany’s upper legislative chamber—and weather a series of legal challenges, but confidence is high that it will ultimately be enacted. Now, the task falls to Merz to turn the spending into success.