German parliament to vote on historic debt reform

Germany’s Bundestag is set to vote on a major fiscal package later on Tuesday, which includes changes to long-standing debt policies to enable higher defense spend and a 500 billion euro ($548 billion) infrastructure and climate fund.

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

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.

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 being a by-product of talks about a potential governing partnership between them.

Time pressure to pass the reforms is high as they require changes to the constitution, meaning it must earn the support of two thirds of both parliament and the Bundesrat. This is likely only possible before the new parliament, which was elected in February, 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 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 which 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.

If all members of parliament that are part of the CDU-CSU, SPD and Green party were to support the package, there would be a 31 vote buffer to achieve the two-thirds majority needed for the Bundestag to pass the reform.

Analysts and economists reacted overall 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 — which is defined by 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.