Yesterday, Germany’s leading political parties (CDU/CSU and SPD) reached a agreement to implement significant fiscal reforms aimed at bolstering defense capabilities and revitalizing infrastructure. The “whatever it takes” plan details follow: (1) Relaxation of the Debt Brake for Defense Spending: The coalition plans to amend Germany’s constitutional “debt brake,” which traditionally limits new borrowing to 0.35% of GDP. Under the proposed changes, defense expenditures exceeding 1% of GDP will be excluded from these fiscal constraints, effectively allowing for increased military funding. (2) Establishment of a €500 Billion Infrastructure Fund: A special off-budget fund totaling €500 billion over the next decade will be created to finance critical infrastructure projects. (3) Increased Fiscal Flexibility for Federal States: The agreement proposes granting federal states additional borrowing capacity, permitting them to incur debt up to 0.35% of GDP annually. This measure is intended to support local infrastructure and public service investments. (4) Long-Term Reform of the Debt Brake: A commission of experts will be established to develop proposals for modernizing the debt brake, with the goal of permanently enhancing investment capabilities. The two important additional details are: (1) the existing limits that the coalition wants to change were a legacy of the Wiedemar republic, which saw an incredible hyperinflation. And (2) in order for them to pass these measures into law, they need a supermajority (66% of votes), which they can only get with the current Bundestag composition. The new one, commencing on March 25th, with right wing AfD blocking majority may not allow these measures to pass. Markets response: thr Dax is up 3.5% and German bunds are sinking.
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