"Triple whammy," "bazooka," "whatever it takes" – the exploratory decision by the CDU/CSU and SPD on the financing of defense and infrastructure spending has caused a tremor in political Berlin. One thing is clear: The new federal government needs a well-calculated financial plan, otherwise, it cannot function. The SPD and CDU exploratory parties have recognized this. With their decision, they have taken an important step towards a future-oriented and viable financial policy.
There has long been a consensus in the scientific community that Germany is facing huge financial challenges. Last year, various research institutions estimated the need for additional public investment at between EUR 60 and 80 billion per year. Added to this is the changed geopolitical situation since Donald Trump took office again. The exploratory decision shows that the financial policy of the coming legislative period will be geared towards the actual needs of the country. This includes both the special fund for infrastructure amounting to EUR 500 billion over the next ten years and the exemption of defense spending beyond one percent of GDP from the debt brake.
Investing now pays off economically. If the special infrastructure fund is flanked by a smart economic policy and thus boosts growth, the overall effect of the special fund could be a long-term reduction in the debt ratio. Investments must also be made now for future generations. The costs of missed investments, for example in climate action, would otherwise have to be borne by young people.
It was also agreed this week that the debt brake will be fundamentally reformed by the end of the year. This is urgently needed to close the remaining financing gaps and ensure the future government's ability to act. Economically sensible investments must no longer suffer from short-term budgetary constraints.
A fundamental reform of the debt brake is also desired by the majority of the population. This was revealed in a representative survey published yesterday by YouGov on behalf of the think tank FiscalFuture. 56% of respondents agree that the debt brake should be reformed or abolished to enable investments without special funds, while only 27% are against it.
It is also important to respondents that the special fund should not only be used for traditional infrastructure such as railways and roads, but also for education and hospitals. The survey asked which areas – in addition to defense – should be invested in most urgently. The four most frequently selected areas:
In addition, a large proportion of public investment needs lie with the municipalities. The municipal investment backlog alone amounts to EUR 186 billion. In principle, the federal states and local authorities were considered in yesterday's agreement: they are entitled to 100 of the EUR 500 billion from the infrastructure fund. In addition, the federal states will be allowed an annual credit margin of 0.35 percent of GDP. In order for the money to arrive, it is important that the federal states also pass the funds on to the municipalities. The new coalition must also tackle the problem of old municipal debt.
The proposed financial package also sends an important message to European partners ahead of today's meeting in Brussels. In the run-up to the meeting, Commission President Ursula von der Leyen had presented a plan to increase European defense spending by up to EUR 800 billion. The core: exemptions for defense spending from the EU debt rules. The same mechanism has now been agreed upon by the exploratory parties with regard to the German debt brake. This will allow the new German government to make a significant contribution to the new EU defense fund.
The pressure on Germany as the second largest military supporter is high. Especially in light of the fact that the USA has stopped supplying weapons and intelligence support to Ukraine. It is an important step that Germany is now not empty-handed when it comes to the new EU defense funding, but is prepared to take on more responsibility towards its partners.
Carl Mühlbach is Managing Director at Fiscal Future, a non-partisan think tank that campaigns for a sustainable fiscal policy. Marina Guldimann is a Junior Economist at Fiscal Future.
