German parliament narrowly approved a plan to relax government borrowing restrictions on Tuesday, spending significant amounts of money on defense and infrastructure, offsetting away from America's Europe and ending years of economic stagnation.
At a special session of the assembly on Tuesday, 513 lawmakers voted for the plan.
It is not a final vote on the plan, it also faces legal challenges. But it was an important hurdle, and its passing was celebrated by centristic lawmakers who hoped Germany would take on a stronger leadership role at a critical moment for Europe.
The heart of the plan, driven by the next prime minister, Friedrich Merz, relaxes what is colloquially known as the “debt brake.”
That brake reduced German debt, but also prevented the government from investing in roads, software, bridges, tanks and other regions. Lawmakers say spending is urgently needed to address Germany's declining competitiveness and US security guarantees.
This will show you how Merz and his allies want to change it, and what comes next.
What is debt brake?
Like most wealthy countries, Germany borrows money and helps balance the annual federal budget. However, unlike some of its peers, particularly the United States, Germany has a constitution that limits annual borrowing to just 0.35% of its gross domestic product. There are exceptions to recessions and natural disasters.
German lawmakers have recently voted to avoid limits with some special money, including emergency pandemic spending that began in 2020 and recent military spending clashes. However, generally, the debt brakes limit borrowing.
When the debt brake was introduced in 2009, Germany, the US and the UK had levels of debt that were roughly similar to the proportion of the economy. Its share has since skyrocketed in the UK and the US, but fell in Germany.
Why does Germany have it?
After the country's fiscal deficit increased during the 2008 financial crisis, the debt brake was added to the German constitution. It was a signature economic policy and became a key point of pride for the people.
But the country's hatred of massive deficits and debts is ahead of the crisis. Its leaders smoothly unified the unity between West and East Germany in the early 1990s, and borrowed a great deal of its economic impacts. More notoriously, the high government debt helped the Weimar government's promotion of hyperinflation in the 1920s, helping to support Hitler's rise.
That historic trauma remained a nervous pain that defined public and political debates about German government debt for generations.
Why change that now?
Borrowing wasn't the only way to rest on debt. The critics say it handcuffed Germany's ability to promote Germany's economy, invest in the future and lead the European security issue.
German spending has lagged behind the needs of upgrading transportation networks, digitizing public services and creating many other investments that are essential to global competitiveness.
The country's net public investment has been negative for the past 25 years, stunting economic growth, according to Marcel Flatzscher, chairman of the German Institute of Economics.
Brake was also the main reason German lawmakers spent relatively little money on the military over decades, believing that the United States would continue to protect its country, as they had been since the end of World War II.
Now, the release of the debt brake is urgent as the German economy continues to shrink and President Trump threatens to withdraw or eliminate the role of America's security in Europe.
“Now, it's not a huge increase in spending,” Flatssher said.
Even Bundesbank, an employee of Germany's Staid Central Bank, is calling for changes to the debt brakes to free up money to promote government investment.
“In Germany's postwar history, government investment is rarely needed as it is today, and it is rarely possible because unity is highly promising with potential returns,” writes an economist at the Deutsche Bank Research Institute.
“Germany has used good years of the last decade to create financial flexibility for more challenging times,” he added. “And the era could remain challenging for the rest of the decade.”
This change was driven more than anything by strategic concerns.
“Reforming the debt brake is centrally important given the groundbreaking change that the US is no longer a reliable ally of Germany,” Green Party's parliament member Anton Hoferitor said in a text message this week.
With this, he said, “It is now possible to fund satellites, intelligence agency, cyber defense and support for Ukraine.
What changes do lawmakers think about?
With the agreement that Merz attacked with the Greens, the Social Democrats on the centre left will create a debt brake exemption for all spending on defense of more than 1% of gross domestic product.
It also broadly defines “defense” and assists domestic intelligence, assistance to allies, and other measures along with the purchase of weapons. Effectively, German lawmakers can borrow amounts that allow the government's bond market to fund these items.
Merz also agreed to expand the new infrastructure fund of 500 billion euros (nearly $550 billion) over 12 years, beyond debt brake restrictions. Of that, 100 billion euros will be allocated for projects to combat climate change.
What are the chances they will succeed?
It's fine, but there are still hurdles.
Having decided to change the constitution to change it, Merz took the extraordinary measure, before becoming prime minister, passing the measure on the last day of the crippled parliament.
After the successful vote on Tuesday, the changes must be approved by the Federal Council on Friday before it is implemented. That could turn out to be very close too.
And yet, the plan faces legal challenges, including alternatives to the German far-right party. The court has refused to suspend previous voting.
Lawmakers from three large centralist parties who support the package say they are confident they will win.
Hours before Congress approved the measure, Lars Klingvale, one of the Social Democrat leaders, told lawmakers:
