German parliament passes historic debt reform, paving the way for higher defense spend

Germany's Bundestag on Tuesday voted in favor of a major fiscal package, which includes changes to long-standing debt policies to enable higher defense spending and a 500 billion euro ($548 billion) infrastructure and climate fund.

More than two thirds of parliament needed to support the package in order for it to pass. The law also needs to be approved by the Bundesrat, a body representing the country's states, on Friday to become enshrined in Germany's constitution.

Under the proposed new laws, defense and certain security expenditures above a certain threshold would no longer be subject to the debt brake, which limits how much debt the government can take on and dictates the size of the federal government's structural budget deficit.

Loans taken on as part of the infrastructure fund would also be exempt from the debt brake, while Germany's states would also have greater flexibility around debt.

Time pressure to pass the reforms is high as they require changes to the constitution and need the support of two thirds of both parliament and the Bundesrat.

This is likely only possible before the newly elected parliament comes together for the first time next week, as parties opposing the fiscal package will then have a larger share of the vote and could potentially block the plans.

Several of the parties that oppose the reforms have also unsuccessfully launched legal challenges to hinder the vote.

In the lead-up to the Tuesday vote, the CDU-CSU and SPD also had to negotiate for the backing of Germany's Green Party, ultimately agreeing on a compromise that includes 100 billion euros of the infrastructure fund being allocated to climate and economic transformation efforts and a broadening of the security-related issues exempted from the debt brake.

Analysts and economists reacted positively to the initial announcement of the plans earlier this month, viewing them as a potentially major boost for Germany's struggling economy.

The German economy narrowly skirted a technical recession — or two consecutive quarters of economic contraction — throughout 2023 and 2024, but has been effectively stagnant.

The OECD on Monday said it was now projecting Germany's gross domestic product to grow by an annual 0.4% this year, down from the previously forecast 0.7% expansion. German economic institute Ifo, meanwhile, said it was cutting its outlook for the country's economy to 0.2% growth year-on-year.

It comes as Germany is facing sustained infrastructure problems, as well as issues in key industries such as housebuilding and autos. The country is also battling the threat of potential tariffs imposed by U.S. President Donald Trump on imports to the U.S. from Europe — which could be especially difficult for Germany due to its high levels of trade with the U.S.