Germany's parliament has successfully approved an unprecedented spending bill that allows the government to fund significant amounts for defense and infrastructure, amounting to hundreds of billions of euros. This signals a notable fiscal change for a country that has long been limited by strict spending constraints imposed by the 'debt brake' policy introduced in 2009.
The passage of this bill, which was proposed by Friedrich Merz, the leader of Germany's conservative CDU/CSU party and the potential next Chancellor, will see defense expenditure surpassing 1% of Gross Domestic Product (GDP), totaling around €45 billion without a specified upper limit. The plan also involves a special €500 billion fund for infrastructure investments over the next twelve years, with proportions allocated to federal government, state governments, and the Climate Transition Fund. Additionally, the borrowing cap for state governments will be raised from 0% to 0.35% of GDP.
The bill was approved by the lower house of parliament, the Bundestag, with 513 votes in favor and 207 against, surpassing the necessary two-thirds majority for a constitutional amendment. Despite this, the legislation still needs to be endorsed by the Bundesrat, representing Germany's 16 federal states, in a scheduled vote on Friday. There is a sense of urgency for Merz to secure the legal amendment before the formation of a new parliament next week, as opposition parties may attempt to challenge the decision.
The landmark spending package has caused positive reactions among investors, with Germany's stock market index, the DAX, recording a significant increase and hitting a record high. Shares of companies like Rheinmetall, Bayer, Continental, and ThyssenKrupp experienced notable gains. While the investment in infrastructure is expected to boost the economy through a cyclical upswing according to Carsten Brzeski, head of macro at ING, he also pointed out that the package may not substantially enhance the country's competitiveness due to prevailing structural issues.