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.

Some 513 parliamentary members voted in favor of the plan, while 207 voted against it. There were no abstentions.

More than two thirds of parliament were 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.

Carsten Brzeski, global head of macro at ING, on Tuesday said the vote meant the debt brake rule is now “not officially dead but buried alive.”  

“Germany has given up on leading the group of fiscal frugals in Europe for the sake of boosting its economy,” he added.

The Christian Democratic Union, alongside its sister party the Christian Social Union, which jointly won the largest share of votes in Germany’s national election in February, proposed the fiscal shift in collaboration with the Social Democratic Party. The factions appear likely to form the incoming coalition government, with the fiscal reform package a by-product of talks about a potential governing partnership between them.