Germany’s Proposed Debt Break Reform and Infrastructure Fund
On Tuesday, March 4th, leaders of Germany’s Christian Democratic Union (CDU) and Social Democratic Party (SPD) announced plans to reform the country’s debt break to allow for increased defence spending and set up a special fund to finance infrastructure investments (Alkousaa and Marsh, 2025). Accordingly, Friedrich Merz, who led the CDU to an election victory in February and is currently in coalition talks with the SPD (Tagesschau, 2025a), proclaimed that “in view of the threats to our freedom and peace on our continents, [the motto] ‘whatever it takes’ must also apply to the country’s defence” (Müller, 2025).
The current debt break prohibits Germany from issuing new debt of more than 0.35% of the nominal GDP per year (around €14-15 billion) (FES, n.d.). Therefore, under the proposed reforms, “necessary defence spending” beyond 1% of GDP would be exempt from these limitations and not included when assessing Germany’s compliance with the debt break (Müller, 2025). Consequently, this would enable Germany to use more debt financing instead of fiscal austerity to meet and exceed NATO’s target of spending at least 2% of GDP on defence (which Germany did in 2024 (Werkhäuser, 2025))—in line with growing pressure from the United States (McLeary and Posaner, 2025) and the newly assertive intentions of the EU (Soler and Lory, 2025).
Simultaneously, at the state level, the debt break is even more restrictive, barring governments from issuing any new debt at all [1]. As a result, the proposed reforms would extend the fiscal leeway currently granted by the federal government to all states (limiting new debt to 0.35% of the nominal GDP) (Tagesschau, 2025b).
Correspondingly, the infrastructure fund would raise €500 billion for investments—with projects spanning civil, energy, research, education, and digitalization infrastructure over the next ten years (Alipour, 2025). Meanwhile, about €100 billion of the fund would be available to state and municipal governments (Tagesschau, 2025c).
Therefore, the CDU-SPD coalition also agreed to set up an expert commission to propose more fundamental reforms to the debt break to implement these reforms by the end of 2025 (Noerr, 2025).
Why It Matters
Both parties indicated that the speed and extent of their proposals were motivated by the Trump administration’s recent decision to suspend military aid and intelligence sharing with Ukraine (Alipour, 2025). Thus, against this backdrop of growing uncertainty about America’s military and diplomatic support, the estimated investment needs of Germany’s military division may be as high as €400 billion (Tagesspiegel, 2025). However, for Germany’s defence minister, Boris Pistorius (SPD), the announcement was “a signal that [Germany wants] to assume joint leadership responsibility in NATO and for Europe” (Nöstlinger, Treeck, and Lunday, 2025).
Additionally, regarding the infrastructure fund, Merz underscored that it was critical for reinvigorating the German economy, which has been in recession for the last two years (Alipour, 2025). Fundamentally, public investment can stimulate economic growth by boosting demand and productivity (Miyamoto et al., 2020). However, infrastructure, in particular, has become a growing concern for many German businesses, who worry about the state of the German transport and energy infrastructure and the lack of digitalization (Kinkartz, 2024). Hence, while EU member states spent an average of 3.7% of GDP on public infrastructure between 2000 and 2022, Germany spent a mere 2.1%, the lowest share among the member states (Rösel and Wolffson, 2022).
Moreover, while the German economy faces many challenges in the years ahead (Barnes, 2025), the proposed spending plans are estimated to raise Germany’s growth rate to as high as 2% (Reuters, 2025). Thus, with the expectation of greater debt burdens and investment, the announcement was followed by an increase in 10-year German bond yields (from 2.5% to 2.7%), while the DAX, a stock index of major German companies, rose by 3.7% (Moller-Nielsen, 2025).
Next Steps
As the debt break is a constitutional amendment, its reform requires a two-thirds majority in both the lower and upper houses of parliament (Bundestag and Bundesrat) (Tagesschau, 2025b). Nonetheless, the infrastructure fund, as a so-called special fund (whose debt is not included in debt break compliance calculations), would also require a two-thirds majority.
However, with the seats that the Alternative for Germany (AFD) and Die Linke (“The Left”) won at the last election, they could block Merz’s plans (Zeier and Grün, 2025). Therefore, to avoid this, Merz is trying to pass the proposal with the support of the outgoing parliament, leaving him a rushed two weeks before the next Bundestag’s first session on 25th March (Tagesschau, 2025d).
Presently, the reform and spending proposals continue to face hurdles: legal challenges by the AFD and The Left (Tagesschau, 2025e), the prospect of opposition by the FDP or Green parties in the outgoing parliament (Völkner, 2025), and potential resistance by Bayern in the Bundesrat (Tagesschau, 2025b). Although, if successful, the plans could pave the way for a stronger and more prosperous Germany, ready to meet the demands of an increasingly challenging global order.
Composition of the new Bundestag and Bundesrat
Footnotes
[1] In more technical language, the debt break currently mandates a structurally balanced budget for states and permits a .35% structural deficit for the federal government (Bundesbank, 2011).
References
Alipour, N. (2025) Everything you need to know about Germany’s game-changing debt announcement, Euractiv. Available at: https://www.euractiv.com/section/politics/news/everything-you-need-to-know-about-germanys-game-changing-debt-announcement/
Alkousaa, R. and Marsh, S. (2025) ‘Germany’s conservatives, SPD agree debt brake reform proposal’, Reuters. Available at: https://www.reuters.com/world/europe/germanys-conservatives-spd-agree-debt-brake-reform-proposal-2025-03-04/
Barnes, A. (2025) ‘Here are five key reasons why Germany’s economy is struggling’, Euronews. Available at: https://www.euronews.com/business/2025/02/17/here-are-five-key-reasons-why-germanys-economy-is-struggling#:~:text=German%20companies%20are%20having%20trouble,couldn’t%20fill%20open%20positions
Bundesbank (2011) The debt break in Germany – key aspects and implementation. Available at: https://www.bundesbank.de/resource/blob/707226/2210049b692ae21558a591e83f4efa24/mL/2011-10-debt-brake-germany-data.pdf
Bundesfinanzministerium (2025) Vorläufiger Abschluss des Bundeshaushalts 2024. Bundesfinanzministerium. Available at: https://www.bundesfinanzministerium.de/Monatsberichte/Ausgabe/2025/01/Inhalte/Kapitel-3-Analysen/3-1-vorlaeufiger-abschluss-bundeshaushalt-2024.html
FES (Friedrich Ebert Stiftung) (n.d.) Schuldenbremse. Available at: https://www.fes.de/wissen/schuldenbremse
Kinkartz, S. (2024) ‘Germany’s infrastructure: Who pays for green energy shift?’, DW. Available at: https://www.dw.com/en/germanys-infrastructure-woes-who-should-foot-the-bill/a-68888105
McLeary, P. and Posaner, J. (2025) ‘Rutte: NATO spending target will be ‘considerably more than 3 percent’’, Politico. Available at: https://www.politico.eu/article/mark-rutte-nato-defense-spending-target-considerably-more-3-percent-munich-security-conference/
Miyamoto, H., Baum, A., Gueorguiev, N., Honda, J. and Walker, S. (2020) ‘Growth impact of public investment and the role of infrastructure governance’, in Well Spent: How strong infrastructure governance can end waste in public investment, pp.15-29.
Moller-Nielsen (2025) German stocks, borrowing costs surge after historic budget announcement, Euractiv. Available at: https://www.euractiv.com/section/economy-jobs/news/german-stocks-borrowing-costs-surge-after-historic-budget-announcement/
Müller, F. (2025) ‘Germany’s Merz in race over debt brake reform to raise defence spending’, Euronews. Available at: https://www.euronews.com/my-europe/2025/03/07/special-funds-for-defence-legislative-change-in-the-fast-lane
Noerr (2025) Unionsparteien und SPD einigen sich auf neues Sondervermögen für Infrastruktur und Teilreform der Schuldenbremse. Available at: https://www.noerr.com/de/insights/unionsparteien-und-spd-einigen-sich-auf-neues-sondervermoegen-fuer-infrastruktur-und-teilreform-der-schuldenbremse
Nöstlinger, N., Treeck, J., and Lunday, C. (2025) ‘Germany’s Merz has 2 weeks to deliver historic spending revolution’, Politico. Available at: https://www.politico.eu/article/germany-friedrich-merz-defense-spending-debt-brake/
Reuters (2025) Germany’s planned spending spree: what it means for the economy, Reuters. Available at: https://www.reuters.com/markets/europe/what-germanys-planned-spending-spree-could-mean-economy-2025-03-05/
Rösel, F. and Wolffson, J. (2022) ‘Chronischer Investitionsmangel—eine deutsche Krankheit‘, Wirtschaftsdienst, 102(7), pp.529-533.
Soler, P. and Lory, G. (2025) ‘How can the EU unlock up to €800bn for its ‘rearmament plan’?’, Euronews. Available at: https://www.euronews.com/my-europe/2025/03/05/how-can-the-eu-unlock-up-to-800bn-for-its-rearmament-plan
Tagesschau (2025a) Knackpunkte bei künftigen Koalitionsgesprächen. Tagesschau. Available at: https://www.tagesschau.de/inland/bundestagswahl/union-spd-verhandlungen-themen-100.html
Tagesschau (2025b) Diese Hürden muss das Milliardenpaket nehmen. Tagesschau. Available at: https://www.tagesschau.de/inland/innenpolitik/huerden-finanzpaket-100.html
Tagesschau (2025c) Was sind Sondervermögen?, Tagesschau. Available at: https://www.tagesschau.de/inland/innenpolitik/sondervermoegen-faq-100.html
Tagesschau (2025d) Alter Bundestag berät in zwei Sondersitzungen, Tagesschau. Available at: https://www.tagesschau.de/inland/innenpolitik/sondersitzungen-alter-bundestag-100.html
Tagesschau (2025e) AfD und Linke ziehen vor Verfassungsgericht, Tagesschau. Available at: https://www.tagesschau.de/inland/innenpolitik/afd-linke-eilantraege-gegen-sondersitzung-100.html
Tagesspiegel (2025) Investitionsbedarf von bis zu 400 Milliarden: Sondierer hoffen auf Einigung bei Finanzen, Tagesspiegel. Available at: https://www.tagesspiegel.de/politik/investitionsbedarf-von-bis-zu-400-milliarden-sondierer-hoffen-auf-einigung-bei-finanzen-13312381.html
Völkner, P. (2025) ‘Reform der Schuldenbremse: Warum Merz von Wahlversprechen abkehrt‘, Frankfurter Rundschau. Available at: https://www.fr.de/politik/reform-der-schuldenbremse-warum-merz-von-wahlversprechen-abkehrt-zr-93608543.html
Werkhäuser, N. (2025) ‘Defense spending: How to pay for Germany’s security?’, DW. Available at: https://www.dw.com/en/defense-spending-how-to-pay-for-germanys-security/a-71537314
Zeier, K. and Grün, GC (2025) ‘German election results explained in graphics’, DW. Available at: https://www.dw.com/en/german-election-results-explained-in-graphics/a-71724186
