Germany’s Merz has two weeks to deliver historic spending revolution

BERLIN — Chancellor-in-waiting Friedrich Merz is promising a constitutional revolution to allow Germany to become Europe’s unlikely big spender — on arms and infrastructure — to contend with a new world order in which America is no longer a dependable ally.

To pull off such a sensational U-turn in the way the world’s third-biggest economy traditionally operates, however, he must secure a political consensus by an ultra-tight deadline: March 25, when a new configuration in the Bundestag will make reform difficult.

It’s hard to exaggerate the scale of the change Berlin is targeting after U.S. President Donald Trump’s withdrawal of military support to Ukraine and his demand that Europe should step in and provide Kyiv with security guarantees against Russia.

Merz is not only suggesting loosening Germany’s own fiscal straight-jacket — the notorious debt brake — but is also pushing the EU at large to relax spending rules so the whole continent can dramatically up its defense spending, and not just rely on America.

“In view of the threats to our freedom and peace on our continent, ‘whatever it takes’ must now also apply to our defense,” said Merz this week, channeling the crisis mantra of former European Central Bank chief Mario Draghi.

This is an astonishing volte-face from the country that preached hardline austerity for countries such as Greece and Italy during the eurozone debt crisis.

In recent years, it was often transatlanticist Germany that pushed back against French efforts for greater spending on the European economy and for more home-grown defense projects. But after Trump’s pivot to Moscow and his administration’s support for the German far right, a clearly disillusioned Merz is suddenly sounding very French in his approach.

“The foreign policy and security situation has changed massively. Three years ago, the chancellor called this a Zeitenwende and initiated this turning point,” a government spokesperson said on Wednesday in Berlin. “Germany is fortunate to have the opportunity to do so thanks to its very sound financial policy.”

Merz heads the center-right Christian Democratic Union (CDU), which won last month’s election. The party has struck a deal on boosting defense and the economy with its likely coalition partner, the Social Democratic Party (SPD).

“There will still have to be talks, but the path has been chosen and it is historic,” Boris Pistorius, Germany’s defense minister from the SPD, said in Berlin on Thursday. “This is a signal that we want to assume joint leadership responsibility in NATO and for Europe.”

The big test for Merz will be to win over the Greens, who are set to join the ranks of the opposition and have formulated additional demands. 

According to the outlines of the deal between the conservatives and SPD, defense expenditures over 1 percent of gross domestic product will be exempted from the constraints of the country’s debt brake — which limits the structural budget deficit to 0.35 percent of economic output, except in times of emergency. The change will allow the country to prepare its military for Washington’s abdication of its traditional postwar role in Europe.

The deal also foresees the establishment of a proposed €500 billion special fund to finance infrastructure projects outside normal budgetary spending over the next decade — which should help Germany’s flagging economy regain some spring in its step.

While economists still want to see the small print, they’re in no doubt of its transformative potential.

“Pending more clarity on this issue, and being mindful of some execution risk, we believe this is one of the most historic paradigm shifts in German postwar history,” said Robin Winkler, chief economist at Deutsche Bank Research.

March 25 deadline 

The latter part of the deal — the €500 billion infrastructure fund — apart from stimulating Germany’s ailing economy is designed to appeal to left-leaning lawmakers who otherwise might oppose the proposals. 

“Democracies are often able to undertake painful reforms only in times of crisis,” Marcel Fratzscher, head of the Berlin-based German Institute for Economic Research (DIW), said in a post on X. The package would “provide a welcome boost to confidence and thus could have an immediate effect on Germany’s economy … [but the] negative impact of the trade conflicts with the U.S. and China and the geopolitical risks will outweigh the positive effects from domestic politics for at least one or two years,” he added. 

But first, Merz has to get the deal over the line.

The aim is to see the package adopted by two-thirds of Germany’s outgoing lawmakers over the course of the next two weeks. If it doesn’t happen within that time, the far-right, pro-Kremlin Alternative for Germany party and The Left, which opposes military spending, will have the strength to block the deal once the newly elected Bundestag convenes by March 25 at the latest. 

To reach a two-thirds majority in the outgoing Bundestag, Merz will depend on support from the Greens, who are already pushing for additional funding for climate measures and further reforms to the debt brake.

“Whether we will approve the deal is an open question,” said Katharina Dröge, one of the parliamentary leaders of the Greens, following negotiations with Merz, which she described as “collegial.”

In a second legislative step, the constitutional amendment must be approved by a two-thirds majority in the Bundesrat, which represents the 16 German federal states. Here, too, much convincing remains to be done.

The Left, meanwhile, has announced it might go to court if the deal is adopted by outgoing lawmakers. 

“There is a lot to question as to whether voting in this time frame, before the constituent meeting [of the next Bundestag], is constitutional,” said Ines Schwerdtner, one of the party’s leaders. “We will examine this.” 

Merz is also facing challenges from within his own party after making a 180-degree turnaround on his election campaign promises. 

“This is a clear defeat for the conservatives, right at the start of the [coalition] negotiations,” said the leader of the youth organization of Merz’s party in a radio interview. “The question is, of course, what is the quid pro quo for this major concession in financial policy.”

Rasmus Buchsteiner contributed reporting.