Defense spending that exceeds one percent of gross domestic product (GDP) will be excluded from the so-called debt brake enshrined in the Basic Law. In practice, this means the possibility of taking out new loans in unlimited amounts. This was agreed upon by the German conservatives (CDU/CSU) and the Social Democrats (SPD) during their talks to form the future governing coalition.
Change in the constitution
The ambitious undertaking must be financed in part by the German economy, which is being given a stimulus injection in the form of an infrastructure package - for investments in roads, railways and other areas. For this purpose, loans totaling 500 billion euros will be taken out, which will flow into a special emergency fund. For comparison: this is slightly more than the size of the federal budget, which in 2024 amounts to 467 billion euros, and more than a tenth of Germany's GDP. This money must be made available quickly and will be available for ten years.
In order to circumvent the debt brake in Germany, which is enshrined in the German constitution, the creation of the emergency fund must also be fixed in the Basic Law - this way the fund will not be subject to the usual restrictions on taking on new debt. However, a two-thirds majority is needed to change the constitution, which the CDU/CSU and the SPD do not have - neither in the old nor in the new composition of the Bundestag. In the new Bundestag, they will have to rely on support from the “Alternative for Germany“ (AfD) or the Left Party. However, both factions reject the emergency funds. That is why the old Bundestag will have to meet again to adopt the constitutional amendment in question - most likely with the votes of the Greens.
What exactly is the money needed for in the field of defense?
The extraordinary funds of 100 billion euros for the Bundeswehr, which were adopted in 2022 in response to the Russian attack on Ukraine, are already fully embedded in the planned expenditures and will be fully spent.
But it is clear that an army that is fully combat-ready needs full equipment of more than 100 percent - that is, comprehensive air and cyber defense, as well as improved intelligence. In addition, long-range precision weapons, ammunition stocks, sufficient unmanned aerial vehicles (drones) and a functioning civil defense are needed. The personnel required for all these activities will have to be obtained from a new military service system in Germany, for which there is currently insufficient capacity in the existing barracks.
In the first six months after the formation of the government, the CDU/CSU and the SPD intend to prepare a law to speed up the planning of activities and the supply of the Bundeswehr. There will also be a list of priority military goods that will have to be procured quickly.
Investment in infrastructure
Crumbling bridges, poor railways and roads: Germany's outdated transport infrastructure is holding back economic development. The Federation of German Industry (BDI) has calculated that additional funds of around 160 billion will be needed over the next ten years. euros for the railway network, motorways and first-class intercity roads, for the renovation of bridges, waterways, ports and for the expansion of public transport. In addition, an additional 100 billion euros are to be invested in education infrastructure, i.e. in kindergartens, schools and universities, as well as 56 billion euros for buildings and housing construction.
Who will pay the loans?
The state is raising new funds by issuing bonds on the capital market. That is, the money will initially come from investors - via money funds or credit institutions. One of the largest investors in the world is the Norwegian sovereign wealth fund.
In the long term, however, the loan must be repaid. The federal government is preparing a schedule for this. In the case of the previous special fund for the Bundeswehr, repayment is planned to start in 2031. The money for this would have to come from the federal budget, i.e. from tax revenues and other government revenues.
Lawyers and economists are already warning that additional emergency funds financed with debt on such a scale would further increase the interest burden in the coming years. This would further worsen the budget situation and significantly limit the political room for maneuver.
Author: Sabine Kinkarz