Friedrich Merz, the winner of the recent German election, is anticipated to encounter significant challenges in increasing defense spending in Europe’s largest nation. This is due to the parliamentary success of parties opposed to arming Ukraine, which have gained enough seats to obstruct any easing of Germany’s stringent public borrowing limits.
Merz had hinted at a willingness to modify Germany’s “debt brake” to facilitate essential infrastructure investments and promote a Europe-wide increase in defense budgets. However, his Christian Democrats (CDU) continued their official commitment to the debt brake as the election approached.
The far-right Alternative for Germany (AfD) and the hard-left Die Linke have secured more than the 210 seats necessary to establish a “blocking minority” in the German parliament. This gives them the ability to prevent any amendments to the debt brake, a constitutional rule set in place in 2009 that limits government borrowing and caps the structural deficit at 0.35 percent of GDP.
This restriction also applies to the creation of special off-balance sheet funds, similar to the €100 billion fund announced by Chancellor Olaf Scholz in 2022 for the overhaul of the German armed forces following Vladimir Putin’s full-scale invasion of Ukraine.
Holger Schmieding, the chief economist at Berenberg Bank, expressed concern that Sunday’s electoral outcome could present significant difficulties for Merz. He highlighted that increasing military expenditure and reducing the tax burden for workers and businesses is crucial, but Germany might struggle to find the necessary fiscal space.
Schmieding further warned that failing to boost military spending could cause problems with Germany’s NATO partners and might provoke displeasure from U.S. President Donald Trump, increasing the likelihood of a US-EU trade conflict.
Jan Techau, a Germany and European defense analyst at Eurasia Group, described the situation as presenting a substantial problem due to the existence of a blocking minority on a crucial issue for the forthcoming government.
Economists have cautioned that without modifying the debt brake or establishing a special off-budget fund, financing the tens of billions of euros needed for vital investments in the Eurozone’s largest economy will be impossible. This includes funding for deteriorating transport and communications infrastructure and significantly increasing defense budgets due to the situation in Ukraine.
The challenge is further complicated by Trump’s return to the White House and his initiation of direct peace negotiations with Russia, coupled with threats to withdraw US security guarantees from Europe. This development has compelled European leaders to engage in crisis discussions to address the resultant security vacuum.
Merz has indicated a belief that funding investments could be achieved by reducing welfare payments and stimulating economic growth, but many analysts remain skeptical that these measures would suffice.
Should Merz opt to reform the debt brake, possibly through collaboration with coalition partners such as Scholz’s Social Democratic Party (SPD) and the Greens, he would need to navigate complex political challenges following Sunday’s results.
The AfD, which achieved a historic second-place finish with nearly 21 percent of the vote, advocates for higher defense spending but opposes arming Ukraine and altering the debt brake. Merz has dismissed any possibility of direct cooperation with the far-right party.
Die Linke, garnering close to 9 percent, supports debt brake reform but is firmly against military support for Ukraine and increased spending on the German armed forces.
Jens Südekum, a professor of international economics at Düsseldorf’s Heinrich Heine University and a proponent of debt brake reform, acknowledged the situation as “difficult to negotiate, but not impossible.”
He suggested that a negotiation with Die Linke might be feasible, potentially involving the creation of a special off-budget fund for civilian infrastructure and reallocating approximately €50 billion in savings from the regular budget to defense funding.
Südekum noted that Die Linke might demand concessions, and Merz could face considerable opposition within his own party to any agreement with the hard-left group.
Some analysts, including Schmieding from Berenberg, suggest that Merz might suspend the debt brake by declaring a national emergency, perhaps triggered by a severe deterioration in Ukraine’s situation. However, such a suspension would permit only a temporary increase in spending and could face legal challenges from Germany’s Constitutional Court. This court previously created a €60 billion gap in the federal budget by ruling against an attempt to allocate pandemic-era emergency funds for the green transition.
Südekum commented that a simpler alignment with the CDU, Social Democrats, and Greens possessing a supermajority would have facilitated implementing necessary fiscal policies in Germany. However, now more complex strategies will be required.
