Germany’s Chancellor-in-waiting Friedrich Merz has proposed what is being interpreted as a seismic shift in his country’s government spending that seeks to bypass legal restrictions on government debt. All this is intended to allow change in defence spending for years to come. The aim is to put Germany in a leadership position as Europe is desperately trying to get strategic autonomy from the United States. Significantly, this would not be done at the expense of vital investments in other areas. The proposed deal, if passed by the outgoing Bundestag this week, would also accommodate the Social Democratic party’s (SPD) demands for spending on economic and social infrastructure. This would be channelled through a €500bn special fund, also to be financed by borrowing.
This is in a way a revolutionary step since Merz, a former investment banker, has been a deficit hawk and economic liberal throughout his career. It is, indeed, an irony of history that he has to pilot a proposal to challenge the debt-aversion that has crippled Germany’s ability to respond to new geopolitical realities. But the Christian Democratic Union (CDU) leader has decided to rise to the occasion admirably and show the political courage to read the writings on the wall.
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The proposal has come at a time when poorly performing economies across Europe and a lack of investment have caused an erosion of people’s faith in mainstream politics and facilitated the dangerous rise of Far-Right forces getting further strengthened by the Trumpian version of the supremacist politics. Germany enshrined in its constitution “debt brake” as a legal requirement to balance budgets for protecting younger generations from the consequences of risky borrowing. However, by rigidly and mechanically following the mechanism in the current tumultuous times faced with costly challenges, Germany has instead stifled investment for its future generations.
The EU summit scheduled to meet in the middle of this week in Brussels is likely to give the green light for greater national spending on defence. This is, as experts point out, the need of the hour considering threats at home and abroad by Far-Right forces. The formula agreed by Merz and the SPD changing the overall approach to debt and deficits could be a model for the EU too. Merz pledged recently to do “whatever it takes” to protect freedom and peace. He will need the support of the Greens, as well as the SPD, to push his game changing proposals through.
In fact, it was the outgoing German Chancellor Olaf Scholz who created a €100bn special fund to modernise Germany’s armed forces three days after Russia’s invasion of Ukraine in February 2022. Russian President Vladimir Putin’s aggression, he told a shocked Bundestag, meant that Europe was living through a Zeitenwende, or turning point.
However, it has taken the return of Donald Trump to the White House to understand the enormity of the emerging threat to European values, security and economic interests. What is important now is the fact that Scholz’s Centre-Right successor-in-waiting seems ready to act accordingly. His election manifesto for February’s snap poll pledged reduced spending on both defence and a stagnating economy. His U-turn now is being appreciated as a proposal to change Germany’s Basic Law to permit huge debt-financed investment in the military and the economy. The measure removes a German political taboo and goes hand in hand with the creation of a special fund of €500 billion over 10 years to modernise infrastructure such as roads, trains and schools.
The two-pronged policy aims at reviving German economic growth, which has been in recession for two years following the shock of the war in Ukraine and enabling Berlin to regain the leadership role on the European stage that the country lost because of the weakness of Merz’s predecessor.
The decision must still be approved by a two-thirds majority in the Bundestag 18 March. For this the new Chancellor has to muster the numbers as his majority in the future parliament is too small to reach the two-thirds mark. His hope stems from the fact that he has chosen to submit his plan to the outgoing Bundestag, where his Social Democrat partners still have large numbers.
The gamble may pay off and in that event Trump and his aggressive team with Far-Right leanings will face the challenge of implementing policies threatening to overturn well established norms of diplomacy and international economic order. That is most needed now.
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The other critical learning from all that is happening in Europe today is how individuals impact international politics and economy. Germany’s economic and military growth has a frightening past as seen both in the 19th and 20th centuries. The re-emergence of that situation per force has been necessitated by the acts of two individuals. First, Putin leading Russia into a long drawn war against Ukraine made the whole of Europe shaky. The presence of the American forces and NATO was viewed as a balm on the wounds. Second, the return of Donald Trump as POTUS upset all previous calculations of most European politicians. Both Putin and Trump being together at one time could be the harbingers of great change that would have long term effect on Europe and the world.
