Germany changes its rules, frees up capital

Germany's parliament approved an unprecedented spending package on Tuesday, breaking with decades of fiscal conservatism in the hope of jumpstarting economic growth and expanding military spending for collective European security.

The package of constitutional changes will free up billions of euros to boost investment after two years of contraction in Europe's largest economy, reported Reuters.

The parliamentary approval strengthens conservative leader Friedrich Merz's position, with the chancellor-in-waiting poised to oversee the massive financial overhaul aimed at reversing Germany's economic decline.

The reforms gained crucial support from Merz's conservatives, the center-left Social Democrats, and the Greens, securing 513 votes from the 720 lawmakers present, which was well above the two-thirds majority needed for constitutional changes.

Merz's conservatives and the Social Democrats, who are negotiating to form a coalition government after last month's election, plan to establish a 500-billion-euro ($546-billion) fund for infrastructure while relaxing Germany's strict debt rules to accommodate higher defense spending.

The changes roll back Germany's strict debt brake law, introduced after the 2008 financial crisis, which had limited government borrowing to 0.35 percent of GDP, except in emergencies. It is a rule many critics say has hampered needed investment, reported Politico.

European leaders have been pushing for stronger military capabilities amid concerns over Russia's advance in Ukraine and uncertainty about the United States' shift in policy under President Donald Trump.

The changes will allow Germany to spend more on defense and Ukraine by exempting military expenditure above 1 percent of GDP from national debt restrictions.

"We have, for at least a decade, felt a false sense of security," Merz told parliament ahead of the vote. "The decision we are taking today on defense readiness ... can be nothing less than the first major step toward a new European defense community."

Both the conservatives and Social Democrats pushed to pass the measures before March 25, when a new Bundestag takes office with more far-right and far-left representatives who could have blocked the legislation. Merz defended the rushed timeline by citing the rapidly evolving geopolitical situation.

Robin Winkler, chief German economist at Deutsche Bank Research, told Reuters: "In our view, this is a historic fiscal regime shift, arguably the largest since German reunification. Yet, as with reunification, a fiscal expansion does not guarantee success: the next government will need to deliver structural reforms to turn this fiscal package into sustainable growth."

European Commission President Ursula von der Leyen welcomed the result as "excellent news".

At a joint news conference with Denmark's Prime Minister Mette Frederiksen, she said the vote "sends a very clear message to Europe that Germany is determined to invest massively in defense".

Frederiksen meanwhile called it "fantastic news for all Europeans".