Investing.com -- CDU leader Friedrich Merz has unveiled plans for a €500 billion special fund to bolster Germany’s infrastructure and defense spending, pushing for a reform of the country’s debt brake.
Speaking alongside SPD and CSU leaders in Berlin, Merz said, “I want to say that very clearly in view of the threats to our freedom and peace on our continent, our defence must now apply ‘Whatever it takes’.”
He stressed that increased defense spending must be paired with economic growth, requiring swift and sustained investment in infrastructure.
The proposal comes amid growing concerns about Europe’s security following Donald Trump’s return to the White House. Trump’s recent decision to freeze military aid to Ukraine has raised fears that he could seek a deal with Russia while pulling back from European commitments.
“We are counting on the United States of America to continue to stand by our mutual alliance obligations in the future. But we also know that the resources for our national and alliance defence must now be significantly expanded,” Merz said.
The CDU/CSU and SPD plan to submit a parliamentary motion next week to amend the constitution, allowing defense spending above 1% of GDP to be exempt from the debt brake. A commission will also draft broader reforms to facilitate long-term investment.
The changes require a two-thirds majority, and with far-right and far-left parties set to gain a blocking minority in the next parliament, conservatives and the SPD are pushing for approval before the transition.
The Greens, whose backing is vital for passing the debt brake reform, said that it would review the proposals but did not make a definite commitment.
Markets reacted strongly to the news, with the euro hitting a three-month high, German bond futures declining, and European defense stocks rallying as expectations of increased spending grow.
Commenting on the announcement, Capital Economics strategists said the agreement “is a major policy shift that should support economic activity in the coming year or two.”
“It looks as if Germany will run budget deficits comfortably over 3% of GDP over the next couple of years rather than keeping the deficit at around 2.5% as we had previously assumed,” the firm noted.
The additional borrowing required to fund this extra spending could put further upward pressure on Bund yields, strategists cautioned.
“Pending more clarity on this issue, and being mindful of some execution risk, we believe this is one of the most historic paradigm shifts in German postwar history,” Deutsche Bank (ETR:DBKGn) strategists said in a separate report.
“It is clear at the time of writing that there is now meaningful upside risk to our 1.0% growth forecast for 2026.”
Germany’s stock market index DAX rose 2.8% as of 08:34 GMT to 22,989. The index touched an all-time high of more than 23,300 earlier this week.