Germany's chancellor-in-waiting Friedrich Merz speaks during an extraordinary session of the outgoing lower house of parliament, the Bundestag, for a vote to adopt the draft law to reform constitutional debt rules and set up a 500 billion euro infrastructure fund, in Berlin, on March 18.Liesa Johannssen/Reuters
Germany has waved auf wiedersehen to the peace dividend. The country that let its military rot away after the end of the Cold War is about to embark on its biggest rearmament program since the 1930s, as Donald Trump signals that the transatlantic alliance is about to get watered down. For Germany, guns have won over butter.
The scenario for the out-of-character spending spree was set Tuesday when the German parliament, the Bundestag, approved a massive stimulus package that will see the constitutional “debt brake” scrapped (approval in the federal council, the Bundesrat, is the next hurdle, though probably a minor one). Investors could not be happier to see Europe’s biggest economy, a slothful giant in recent years, set to lurch back to life.
With the debt brake gone, Berlin can unleash as much as €1-trillion ($1.56-trillion) to shore up the military and infrastructure in the coming years. Already, German and European growth forecasts are being upgraded by analysts, and certain sectors of the stock market are on fire. Shares of German weapons company Rheinmetall, maker of the Leopard 2 main battle tank, are up 200 per cent in the past year and rose again Tuesday, reaching a new high.
To call the spending about-face momentous is an understatement. Since paying for German reunification in the early 1990s, Berlin has been miserly to a fault. In 2009, under the Christian Democratic government of then-chancellor Angela Merkel, the government limited borrowing to a mere 0.35 per cent of gross domestic product – the debt brake – though it could be adjusted somewhat to fit economic cycles.
The good news is that the cap gave Germany one of the lowest debt-to-GDP ratios of any Western economy, the European Union’s lowest borrowing costs and global respect for its holier-than-thou rectitude as Greece and other clapped-out countries in Southern Europe became overwhelmed with debt.
The bad news is that infrastructure and military spending plummeted. Roads and rail in Europe’s most prosperous country fell apart, and soldiers were forced to make do with shabby equipment. Germany perennially spent way less on its military than the 2-per-cent-of-GDP threshold set by NATO in 2014, after Russia annexed Crimea from Ukraine. (Canada has also been a serial tightwad when it comes to defence spending.)
The Bundestag easily reached the two-thirds threshold to pass the new spending program. The deal was effectively sealed last week when Christian Democratic chancellor-in-waiting Friedrich Merz, the Social Democrats and the Greens agreed to put their differences aside. The Greens insisted that the infrastructure spending would not sidestep environmental goals and that the fresh euros to be doled out would not come at the expense of other programs.
The spending bill is set to free €500-billion ($782-billion), all borrowed money, in infrastructure outlays and ensure that defence spending in excess of 1 per cent of GDP will be released from borrowing restrictions. In effect, the removal of the debt brake means there is no upper limit on buying everything from tanks and missiles to submarines and fighter jets. Mr. Merz seems to be putting Germany back on a war footing as Russian forces make gains in Ukraine in a war that is now in its fourth year. “It’s a war against Europe and not just a war against the territorial integrity of Ukraine,” he told lawmakers.
What’s more, Germany’s 16 states will no longer be required to run balanced budgets, meaning they can borrow to fund infrastructure spending on top of the federal government’s. German trains may soon run on time. Hospitals, schools and power grids will be fixed up.
Germany’s rush to rearm has sent European defence stocks soaring. Investors think the German spending spree will be contagious and possibly lead to a general reshaping of the industry as newly jingoistic European governments favour homegrown champions over mighty, Trump-friendly U.S. players such as Boeing Co., Lockheed Martin Corp. and General Dynamics Corp. Already, Airbus SE, Italy’s Leonardo SpA and France’s Thales SA are considering putting their space businesses together. The prospect of rebuilding Fortress Europe could trigger a flurry of defence startups, the construction of new factories (or the commandeering of idle car factories) and breakthroughs in AI, drone warfare and robotics.
But Germany’s spending package is not necessarily a long-term economic game-changer, even if it will spur growth fairly quickly. Blasting out billions for defence and infrastructure on their own will not necessarily make the economy stronger for longer. What the country also needs is compelling structural reforms on pensions, the retirement age, austerity measures, taxation and the like, plus a rethink on environmental policies. Germany will soon have the fiscal space to modernize everything from tunnels to tanks. What it needs just as much is a plan to make the economy more competitive as Europe, China and the United States engage in a global trade war in which Mr. Trump is determined to take no prisoners.