On March 19, 2025, Germany's Federal Assembly made a landmark decision by approving a constitutional amendment that enables the establishment of a 500 billion euro special fund aimed at bolstering infrastructure and climate initiatives. Additionally, this amendment allows defense spending to be excluded from the country's stricter debt brake regulations.
This pivotal vote followed intense negotiations between the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD) regarding amendments to three articles within the constitution. The legislative step saw overwhelming support in the Federal Assembly, with 513 votes in favor against 207, participation involving a total of 720 lawmakers. This new measure is set to revitalize Europe's largest economy and enhance growth within the Eurozone.
Friedrich Merz, the Chairman of the CDU/CSU Federal Assembly Group and a likely future chancellor, spoke on the implications of this decision. He asserted that the escalated defense spending plan stems from the ongoing war Russia has waged against Ukraine, stating, "This is a war against Europe, not just against Ukraine's territorial integrity. It's also a war being waged against our country every day." Merz emphasized the need to reconstruct Germany's defense capabilities, which he described as having suffered from a prolonged "false sense of security" over the past decade.
The new constitutional amendments aim not only to bolster Germany's defense infrastructure but also to lay down a financial foundation for sustained investments in climate and infrastructure throughout the nation. As Merz explained, these improvements will involve modern defense systems, including armed drones and autonomous capabilities, marking a significant shift in Germany's defense posture.
As projected, the Bundestag's decision will be subject to further approval from the Bundesrat, with a vital vote scheduled for March 21, 2025. This legislative momentum indicates a seismic shift in Germany's fiscal policy, now allowing unchecked spending on military capabilities, which was previously constrained under the debt brake.
Simultaneously, Fitch Ratings has issued a cautionary perspective regarding this financial maneuver. In a recent report, the international credit rating agency indicated that Germany's "AAA" credit rating could face long-term pressure if the substantial borrowing allocated for defense and infrastructure does not resonate with corresponding fiscal reforms or result in a permanent boost to economic growth.
Fitch's analysis highlighted that while increased expenditures could indeed stimulate economic growth and enhance Germany's competitive positioning in international markets, these efforts by themselves may not lead to significant long-term improvements. The report expressed the urgency of focusing on structural reforms and fostering a more competitive economic environment to secure sustained growth.
The projected additional expenditures over the next decade reach a staggering estimate of 900 billion to 1 trillion euros, which translates to slightly more than 20 percent of Germany's Gross Domestic Product (GDP), based on 2024 data. Fitch estimates that these expenses will contribute approximately 0.4 percentage points to GDP between 2025 and 2027, despite expectations that the country’s budget deficit could escalate from 118.8 billion euros last year—approximately 2.6 percent of GDP—to a projected 4 to 4.5 percent of GDP by 2027. Believing this fiscal trajectory will push public debt levels to 70 percent of GDP, Fitch remains cautious about the long-term viability of such financial policies.
As Germany embarks on this ambitious path of increased defense spending and investment in national infrastructure, the interplay between economic growth, public expenditure, and the need for structural reform will play a crucial role in determining the effectiveness of these measures. The decision taken by the Bundestag marks a major step toward reshaping not only Germany’s defense capabilities but potentially its economic future in the context of evolving geopolitical tensions across Europe.
