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Call it a very big bazooka indeed, or Germany’s “whatever it takes” moment. There are few more striking signs of how Donald Trump is upturning the old world order than incoming chancellor Friedrich Merz’s epochal agreement with the rival Social Democrats to loosen Germany’s debt rules to fund massive investment in infrastructure and the military. The resulting stimulus could be the largest since after reunification in 1990. Its partners should celebrate Germany’s move back towards providing the economic, political and defensive leadership Europe needs.
The shift is all the more surprising given the ambivalence of Merz and his Christian Democrats towards loosening Germany’s 16-year-old debt brake during the recent election campaign. But the flexibility to dump old opinions when the facts change is a sign of leadership. Merz and his likely coalition partners deserve credit for recognising the realities of the world under Trump, and responding swiftly rather than — as other EU capitals had feared — spending months in argument and indecision.
The package is bigger than expected even days earlier. The €500bn special purpose vehicle for infrastructure investment, with one-fifth going to federal states, should reverse years of underfunding in transport, hospitals, energy, education and digital infrastructure — and help to revive flagging German industry. Allowing essentially unlimited borrowing for defence spending will give long-term predictability to the Bundeswehr. Analysts project expenditure could reach 3.5 per cent of GDP in 2027, from 2.1 per cent in 2024. In an economy of Germany’s size that is a huge boost.
The incoming government will still have to move swiftly from granting itself permission to spend more, to making real commitments and plans to do so. Arms manufacturers need confidence to set up new production lines. The Zeitenwende, or turning point, announced by chancellor Olaf Scholz after Russia’s 2022 invasion of Ukraine, with the €100bn fund to modernise the military, fell short of its ambition — though it helped to pave the way to today’s transformational shift.
Some big allies warn that Berlin still needs to develop a strategic culture and ability to project military power. Whether Germany is willing to commit to join a postwar stabilisation force in Ukraine will be an early test of whether its new military push amounts to more than just a financial commitment.
Berlin will have to keep one eye on the markets, after German borrowing costs surged by the most in 28 years on Wednesday. This was, though, an orderly price adjustment reflecting higher forthcoming bond issuance and a pricing-in of a better growth trajectory. Higher German borrowing costs will nudge up costs across the Eurozone, but this will be offset by the positive narrative that Europe’s largest economy is spending again, and the boost to demand across the EU.
Germany’s reawakening is above all a sign that a crisis is prompting Europe to come together once again — to respond to the challenge laid down by America’s disrupter-in-chief. After the initial leadership of France’s Emmanuel Macron and Britain’s Keir Starmer, Merz’s initiative adds a German pillar that will bolster the European effort and make it more credible to Washington. It follows welcome EU moves to ease fiscal rules for national defence spending, although Brussels’ plan for €150bn common borrowing for rearmament looks underpowered. Though the need was clear after Trump’s first term and Russia’s assault on Ukraine, Europe tarried too long in taking real steps to bear more of its own defence burden. However belatedly, it is now racing to catch up.
