BERLIN (Reuters) – The parties in talks to form Germany’s new government on Tuesday agreed to try to loosen fiscal rules for defence and federal states’ spending, and to create a 500 billion euros ($529.95 billion) special fund to boost the country’s infrastructure.
The conservatives CDU/CSU and Social Democrats said they would put their plans to Germany’s lower house of parliament Bundestag next week before the new parliament convenes.
They are rushing to pass the plans as the far-left and far-right parties will have a blocking minority in the new parliament.
Here are the details of this agreement:
DEFENCE:
Defence spending that exceeds 1% of gross domestic product will not be counted towards Germany’s debt brake which limits government borrowing to 0.35% of GDP, meaning defence spending will no longer be capped.
With a GDP of around 4.3 trillion euros in 2024, 1% would be around 43 billion euros and all defence spending above that will be exempt from the debt brake.
The exemption should enable Germany to hike its regular budget for defence – currently at around 52 billion euros – to reach the NATO goal of 2% of economic output.
It had met that goal for the first time in 2024 but only thanks to a special fund established after Russia’s invasion of Ukraine that is due to run out soon.
Without U.S. support, Germany would need to increase defence spending further, up to 140 billion euros from 80 billion, equivalent to 3.5% of GDP, a study by research institute Bruegel and the Kiel Institute for the World Economy showed last month.
The conservatives and SPD will present a planning and procurement acceleration law for the Bundeswehr and a priority list of armaments that can be procured quickly within the first six months after the formation of the government.
INFRASTRUCTURE:
A special off-budget infrastructure fund of 500 billion euros of ten years will be created for the federal government, states and municipalities.
The money should be used in particular for civil and population protection, transport, energy, education, care and science infrastructure, in addition to hospital investments and research, and digitisation.
FEDERAL STATES:
Around 100 billion euros of the infrastructure fund should be available to the federal states and municipalities that have been struggling with financial deficit.
The states will also be allowed to take on more debt through up to 0.35% of economic output each year, similar to the federal fiscal rule.
LONG TERM DEBT BRAKE REFORM:
A commission of experts will develop a proposal for modernizing the debt brake to boost investments on a permanent basis. The proposals will be a basis for a debt brake reform draft law that the parties want to conclude by the end of 2025.
Germany’s central bank proposed earlier on Tuesday a far-reaching reform which could give the government up to 220 billion euros worth of extra cash for defence and investment this decade.
($1 = 0.9435 euros)
(Reporting by Riham Alkousaa, Holger Hansen and Markus Wacket; Editing by Daniel Wallis)
