German parties strike deal on debt brake to fund defence, infrastructure

(Sharecast News) - Germany's likely ruling coalition partners have agreed a deal to spend billions on defence and infrastructure as part of a major reform to spending rules.

Friedrich Merz, leader of the CDU/CSU alliance which won the largest share of the vote at the recent federal election, said his group and the Social Democrats (SPD) would present a bill in parliament next week to loosen the so-called debt brake which limits spending as a proportion of GDP.

The news saw German shares surge in response, with the country's main DAX index up almost 3% and a sharp jump in the 10-year government bond yield.

The move is a response to US President Donald Trump's pivot towards Moscow over the war on Ukraine - arms shipments to Kyiv were suspended on Tuesday - and ultimatums that Europe should raise defence spending.

Under the German proposal, defence spending above 1% of GDP would be exempt from the debt brake rules - which limit new borrowing to 0.35% - effectively writing a blank cheque on weapons purchases. The restrictions were enshrined in law after the global banking industry caused the financial crash of 2008.

The future coalition partners also proposed another constitutional amendment to set up a €500bn fund for infrastructure, which would run over 10 years. They are also planning to loosen debt rules for states bringing them to the federal level.

"Europe must now grow up and Europe must be able to defend itself, and we want to rapidly make progress on this path, step by step," Merz told reporters said alongside the CSU and SPD leaders, adding that Germany must adopt a "Whatever it takes" stance.

"The additional spending on defence can only be coped with if our economy returns to stable growth within a very short period of time . . . This requires rapid and sustainable investments in our infrastructure."

The bills need a two-thirds majority in parliament to pass, which means Merz will have to reconvene the existing Bundestag which is legally still in session until later this month and also win crucial support from the Green Party. It also excludes the participation of the far-right Alternative for Germany party, which came second in the election.

Reporting by Frank Prenesti for Sharecast.com