What the agreement means Germany wants to put together a gigantic financial package

The CDU/CSU and SPD have reached an agreement on massive investments in armaments and infrastructure during exploratory talks. A lot of money is at stake. What the historic financial package means.

The sums involved are gigantic - and a surprise for Germany and Europe: the CDU/CSU and SPD not only want to create a special fund for investment in infrastructure, but also want to apply the debt brake to defense spending. The CDU/CSU had recently ruled this out. However, a decision in the Bundestag will require votes from the Greens or the FDP.

What exactly is the proposal?

The debt brake enshrined in the German constitution is to be adapted so that defense spending that exceeds one percent of gross domestic product is excluded. There is to be no upper limit, which would theoretically allow unlimited loans.

In order to finance this, the economy is to be stimulated - by investing in infrastructure, i.e. roads, railways, bridges and more. To this end, loans amounting to 500 billion euros are to be taken out, which will flow into a special fund. By way of comparison, this is slightly more than the volume of a federal budget and more than a tenth of Germany's gross domestic product. The money is to be made available quickly and paid out over ten years. To ensure that this can bypass the debt brake, the special fund is to be anchored in the Basic Law and exempted from the debt rule.

In addition, the federal states should also be given the opportunity to incur more debt. Their debt brake, which is currently particularly strict, is to be adapted to the somewhat more flexible federal regulation.

What chances do the plans have in the Bundestag?

The CDU/CSU and SPD cannot decide on this alone, as a two-thirds majority is required for amendments to the Basic Law. In the old Bundestag, this would be possible together with the Greens or the FDP. However, the FDP has so far categorically rejected a reform of the debt brake. The exploratory parties are therefore likely to rely on the Greens.

The CDU/CSU, SPD and Greens no longer have a two-thirds majority in the new Bundestag, which will be constituted on March 24 or 25. The Left and AfD can block an amendment to the Basic Law - and they both reject special funds. That is why the old Bundestag is to come together again in the last few meters.

Why is more money needed for the Bundeswehr?

The special fund of 100 billion euros for the Bundeswehr is almost completely earmarked. It is already clear that there is still a long way to go on the road to military viability. As early as March 2023, Defense Commissioner Eva Högl said: "The 100 billion euros alone will not be enough to compensate for all shortfalls; according to military experts, this would require a total of 300 billion euros."

The order of magnitude: The regular defense budget consists of around 53 billion euros and only meets the two percent NATO target because the previous special assets are included. According to Defense Minister Boris Pistorius, the two percent target alone will require a total of 85 to 90 billion euros per year from 2028, which means 120 billion euros for defense spending of three percent. By opting for an exception to the debt brake, a path is now being taken that Pistorius has repeatedly called for in public.

What can be paid for with the additional money for the Bundeswehr?

A war-capable Bundeswehr that deters attackers and can hold its own in a battle requires full equipment beyond 100 percent ("replacement"), extensive air defense and cyber defense and improved, independent observation of potential opponents ("reconnaissance"). In addition, far-reaching precision weapons ("deep precision strike"), stocks of ammunition, a kind of drone army and a functioning homeland defense beyond the previously planned new division. The personnel for this is also to come from a new military service, whereby barracks and accommodation are currently the bottleneck. The current special fund has a narrowly defined purpose and limits investment in infrastructure. Still completely unclear: in the event of an agreement, Germany could participate in the nuclear deterrent potential of France and Great Britain.

Why does the federal government need so much money for infrastructure?

Dilapidated bridges and railways, roadworks: There is a huge investment backlog in transport infrastructure. "Freight and passenger traffic is now significantly restricted by the outdated infrastructure, which is hampering Germany's economic development," according to the annual report by the "Wirtschaftsweisen". The Federation of German Industries has calculated that additional funds of around 160 billion euros are needed within ten years for the rail network, freeways and federal highways, bridge renewal, federal waterways, ports and the expansion of public transport. The BDI also sees a need for an additional 100 billion euros for education infrastructure, i.e. daycare centers, schools and universities, as well as 56 billion euros for buildings and housing.

CSU leader Markus Söder spoke of an "XXL" economic and infrastructure package, the size of which is unique in Germany. It is also about strengthening the energy supply, construction, childcare, digital schools and hospitals.

What could a special infrastructure fund achieve?

Up to now, investment in infrastructure has had to be negotiated every year in the federal budget talks - in other words, according to the cash situation, depending on the economy and tax revenues. A special fund would create a reliable financing perspective and planning security for clients, engineering firms and the construction industry.

According to the Federation of the German Construction Industry, special funds offer the advantages of using financial resources for a specific purpose and with clearly defined targets, as well as creating planning security for infrastructure projects. "A long-term package could finally free the construction of ecological and future-proof infrastructure from annual budget squabbles," said Greenpeace transport expert Lena Donat. The interest group Allianz pro Schiene sees an opportunity to reduce the gigantic backlog of rail renovation work.

Who will ultimately have to pay for the loans?

The state raises fresh money by issuing bonds on the capital market. Initially, the money comes from investors, such as pension funds or credit institutions. One of the largest investors in the world is the Norwegian sovereign wealth fund. In the long term, however, the loan must then be repaid. In the case of special assets, the federal government sets a schedule for this. In the case of the current special fund for the Bundeswehr, for example, repayment is planned from 2031. The money for this must then come from the federal budget, i.e. from tax money and other state revenues.