CD-U-turn - The new German spending rules

By Ben Rosenbaum, Reading Time: 5 mins

In an unexpected course reversal, Germany’s expected next chancellor, Friedrich Merz, pushed new spending rules through parliament. While these changes have broad support, Merz now faces questions about his credibility and whether these financial changes will be effective.

German chancellor-in-waiting Friedrich Merz leaving the debating chamber after the vote to loosen the country’s debt rules at the Bundestag in Berlin, licensed under CC BY 4.0

Merz’s About Face

During the election campaign that ended on February 23, Friedrich Merz and his Christian Democratic Union (CDU) repeatedly ruled out changing Germany’s federal spending rules, which have been described as some of the most restrictive in Europe. 

Since 2009, the “debt brake” has been in effect, strictly limiting the amount of government spending. Introduced by a Christian Democrat-Social Democrat grand coalition, the debt brake means that the federal government’s borrowing can only amount to 0,35% of Germany’s GDP. The German states (Länder) were prohibited from taking on any new debt. 

For then-Chancellor Merkel and finance minister Peer Steinbrück, the debt brake was an act of securing governmental financial stability and intergenerational justice, meaning that future generations would not have to bear the debt burden of previous ones. On the other side of the political spectrum, the Green party and the Left party were critical of what they saw as the state shackling itself. However, the CDU remained steadfast in supporting the debt brake also after Merkel left office in 2021. 

Legally, the debt brake was enshrined in Germany’s Basic Law in Articles 109 §3 and Article 115 §2, thus placing an additional hurdle on changing the rules, since a two-thirds majority of both Bundestag and Bundesrat (the assembly of the states) is required to change the Basic Law. 

Most notably, exceptions for additional spending are only possible in extraordinary circumstances and moments of crisis. For example, the German parliament authorised 60 billion Euros in debt during the COVID-19 pandemic and another 100 billion after Russia’s invasion of Ukraine. The 60 billion Euros set aside for combating the Covid pandemic later became the subject of controversy after the German Constitutional Court ruled in 2023 that these funds, although no longer needed for their original purpose, could not be used for climate-related investments by the federal government.

That ruling put debate about the debt brake front and centre in German politics, with the debate about the budget eventually leading to the collapse of the Traffic Light coalition between Social Democrats (SPD), Greens, and Free Democrats (FDP) last November. While Social Democrats and Greens were open to change, the Free Democrats strictly opposed any reforms. After the collapse of the coalition, Merz hinted at the possibility of reforming the debt brake, only for other CDU officials to quickly state that the Christian Democrats continued to support the debt brake unequivocally as they had done during the traffic-light coalition's budget fights.

This long-standing and openly expressed commitment made it all the more surprising that three days after the CDU won the election, Merz emerged from talks with the Social Democrats (his likely coalition partner) to announce a policy u-turn: Defense spending exceeding 1% of GDP would be entirely exempt from the debt brake, while 500 billion euros would be borrowed to fund infrastructure investments

To justify this policy reversal, Merz argued that geopolitical developments such as the reelection of US President Donald Trump and the resulting uncertainty that this entailed for Ukraine, pressured Germany to do “whatever it takes” for its defence.

Green opposition

However, these bold plans likewise caused problems: Since the debt brake is enshrined into Germany’s Basic Law, a two-thirds majority was needed in the Bundestag to pass this reform. The votes of the CDU, its Bavarian sister party CSU and the SPD were not sufficient to pass this threshold. In the newly elected parliament, the Left party and the AfD could collectively block the reform, and both parties were unlikely to agree to the new spending rules.

Therefore, Merz and his allies presented a constitutionally novel plan: The old Bundestag should vote on the plans before the new one held its first session on the 25th of March. In the old constellation, CDU/ CSU and SPD only needed the votes of either the Greens or the Free Democrats to pass their proposal.

With the Free Democrats vehemently opposed to changes to the debt brake, Merz hoped that he could count on the Greens’ support simply because he had finally acquiesced to their demand for spending reform. But he was proven wrong: The Greens criticised that Merz had reversed course after the election when reforms could have been passed in November. Additionally, the Greens argued that money was also needed to be set aside for climate change-related investments.

With the Left and the AfD calling on the German Constitutional Court to cancel the special sessions of the old Bundestag, and the Greens unwilling to agree to Merz’s proposals, it looked like Germany’s prospective chancellor would face his first parliamentary defeat before even swearing the oath of office.

Luckily for Merz, the Constitutional Court rejected the claims by the Afd and the Left and cleared the way for the special session of the old Bundestag, and finally, after intense negotiations, a compromise was reached with the Greens: they would support Merz with their votes and in exchange, 100 billion Euros would be set aside for “Climate and Transformation Fonds”.

What does this say about the next German government?

Initial reactions from businesses highlighted the need for wider structural reform, as new spending rules alone would not be enough to change Germany’s economic course. The calls for more digitalisation and less bureaucracy also highlight the challenges that Merz and his government will face once they enter office. 

The ability of CDU/ CSU, SPD, and Greens to find a compromise may be seen as a positive sign for the future of Germany’s democratic centre, after emotional and polarising debates about immigration in January had cast a doubt on the possibility of the three parties cooperating in the future. The question now is whether the parties will display the same ability to compromise in the future when deciding where exactly all the now available money will be spent.