Germany’s Melz strikes a ‘game-changing’ deal to increase defense spending

Brigadier General Friedrich Merz reached an agreement with his possible alliance partners to restore Europe’s largest economy with hundreds of billions of dollars in additional funds into Germany’s military and infrastructure.

Melz’s announcement just a week after winning the federal election late Tuesday, his Christian Democratic Union (CDU), Bavaria’s sister party and rival Social Democratic Party (SPD) will jointly introduce a bill in parliament next week to relax the country’s strict lending rules.

A provision would exempt more than 1% of GDP from defenses, while the “debt brake” that restricts government borrowing allows Germany to raise unlimited debt to fund its armed forces and provide military assistance to Ukraine.

Future alliance partners will introduce another constitutional amendment to establish a €50 billion infrastructure fund that will operate in 10 years. They also plan to relax state debt rules.

The news triggered the biggest sell-off in Germany’s government debt since Wednesday since 2020 as investors prepared for a substantial increase in borrowing. The eurozone’s 10-year appearance yield rose 0.19 percentage points, with early trading yields rising to 2.67%.

“Changes in the fiscal sea will permanently change the way forex trading,” said Tomasz Wieladek, chief economist at asset manager T Rowe Price.

US President Donald Trump stimulated Europe’s sense of urgency, and Germany’s massive fiscal stimulus also emphasized Europe’s sense of urgency.

“This is a change in Germany’s fiscal ocean,” said Holger Schmieding, chief economist at Berenberg. “Mels and his quasi-alliance are rising.”

Merz, who was president of the European Central Bank, echoed Mario Draghi’s oath to serve as the euro zone in 2012, said Germany would take “any need” to resist Europe’s “threat to freedom and peace”.

Standing with the leaders of the SPD and the Bavarian Christian Society Alliance at a press conference in Berlin, Meers said the plan would also promote Germany’s flag economy, with the country’s economy suffering two years of stagnation after decades of underinvestment in railways, roads, bridges and communications infrastructure.

“Only when our economy returns to steady growth in a short period of time can additional defense spending be dealt with. . This requires fast, sustainable investment in our infrastructure.”

The bill requires two-thirds of parliamentary seats, which means Melz will have to re-extract the outgoing federal government elected in 2021 and ensure support from the Greens.

The plan marks a surprising shift in Germany’s traditional conservative stance on fiscal stimulus. Berlin elaborated on debt braking in its constitution in 2009, which restricted government borrowing and kept the structural deficit at 0.35% of GDP.

Defense experts and economists welcome Meyers’ decisive steps.

Jana Puglierin, senior policy researcher at the European Council on Foreign Relations, said: “This is a huge investment in Germany’s ability to act – and it is possible in Europe. [ability to act] If Germany can be traced back to constructive European leaders. ”

Liana Fix, a European researcher at the Washington-based Foreign Relations Council, said the move marks “real Zeitenwende” – A watershed moment – Outgoing Prime Minister Olaf Scholz promised to announce a €100 million defense fund after Russia’s full invasion of Ukraine in 2022.

Meles’ conservative CDU/CSU opposes reforms toward debt braking ahead of the February 23 election. However, hours after its first appearance in the national vote, the staunch transatlanticist announced that Europe needs to achieve “independence” from Washington, as Trump appears to be “largely indifferent” to Europe’s fate.

Jens Südekum, a professor of international economics in Düsseldorf, urged Merz to reform the debt brakes, which he would declare to be the “total game changer.”

Merz has accelerated coalition talks with SPD since Trump publicly informed Ukrainian President Volodymyr Zelenskyy last week at the White House. The Ukrainian authorities and their European allies this week will only add to the urgency of the Ukrainian government.

Avoiding defensive spending on debt rules “is a wise way to do that, a few days ago, it seemed impossible,” said Henning Meyer, a professor at Tübingen University, approaching SPD. Defense “does not lend to defined special funds. You just don’t know how much time it takes and what time frame it takes,” he said.

Pugrilyn said Meiers “takes huge personal risks” by moving quickly from the campaign statement.

“He just did this so quickly and decisively because he did indeed see an absolute emergency in Germany and Europe,” she said. “It would be impossible without the actions of the Trump administration in recent weeks.”

The preliminary agreement paves the way for a broader alliance agreement with the SPD. Germany’s next prime minister hopes to use the super tribute of the outgoing parliament to pass the constitutional amendment as his government may be blocked by far-right Germany and left-wing Dick Link in the next parliament.

The current parliament can be called until March 25 before the new MP can sit down.

The European Commission on Tuesday outlined a joint debt instrument that would enable member states to fund the purchase of military equipment, and the agreement reached between Merz and SPD.