It took Friedrich Merz several hours to carry out one of the sharpest U-turns in recent political history.
At lunch last Friday, the German Prime Minister received a calm explanation from Finance Minister Jorg Kukeys about the state of the economy.
Kukies explained that after two years of stagnation and clouds gathered on Europe’s largest economy, Berlin faced a budget shortage of 130 billion euros, reducing its growth potential, according to people with knowledge of the presentation.
Shortly afterwards, Donald Trump accused Ukrainian leader of not wanting peace with Kiev invader Russia of not appreciating Washington’s support, and held a public match with Voldymi Zelensky in an oval office. For Washington’s allies in Europe, the extraordinary scene was further evidence that the Trump administration became hostile.
Seeing all this unfolding, Meltz decided that “there’s no time to lose,” says someone close to his thoughts.
Last week, Donald Trump and Volodimia Zelensky were in an oval office. Within days of the meeting, German CDU and SPD parties agreed to inject hundreds of billions into the country’s military and aging infrastructure ©Pool/Bloomberg/Getty Images
Within days, the central right leader of the Christian Democratic Union (CDU) signed a contract with his potential coalition partner, Social Democrats (SPD), the next government that will change the way Germany’s economy is managed.
The parties agreed to loosen the country’s constitutional debt brakes and inject hundreds of billions into Germany’s military and aging infrastructure.
Under a contract that must still be approved by a two-thirds majority, Berlin can raise the debt required to equip Vandeswale. In return for support in the defense, the SPD has secured the creation of a 10-year infrastructure fund of 500 million euros to modernize the country’s roads, bridges, energy and communications networks, one of the party’s flagship campaign pledges.
In light of Europe’s “threat to freedom and peace,” it’s time to adopt a “do anything” approach to defense, Mertz said Tuesday when he announced the contract with leaders of Bavarian sister party CSU and SPD.
The agreement not only represents a tough departure from the dominant economic orthodox brand in Germany, but also accelerates movement away from the military detention of decades after World War II.
“This is a major shift from this stance of “not borrowing, but making time with the money you have,” which was a pillar of the modern German economy and something that Germans are truly proud of,” says historian Katcha Heuer.
“It shows Germany plays a bigger role on the world stage, but sometimes Germany can see more after its own interest.”
The outlook for enormous investment in the defense sector has encouraged the hope that Germany can stop industrial and technological decline by helping manufacturers and engineers find new objectives and new markets.
This has been “one of the most important changes in Germany’s economic policy” since World War II, says Vikram Agarwal, investment manager at Jupiter Fund Management.
“It means returning to Germany,” said Joe Köser, former chief of German engineering giant Siemens, who is now chairman of Siemens Energy and Daimler Truck.
Potentially more than a ton of additional debt over the next decade, economists compared fiscal stimulus packages to national unification in 1990, when a government led by CDU Prime Minister Helmutcole poured billions of dollars into former Eastern Communist states.
The impact on German industry should be important, and economists, policymakers and executives believe defense contractors will help replace some of the shrinking automotive infrastructure and infrastructure projects.
“We should not underestimate what trust does in investment and employment decisions,” Kaeser said. “This is a valuable effort to set up a mission. This is what we’re trying to do. This landing on the moon.”
According to BNP, the announcement can provide a “stimulus of positive confidence.” It is encouraging consumers and businesses. Germany’s economy has been caught up in ruts over the past two years – could expand by 0.7% in 2025, compared to 0.2% growth in previous scenarios, the bank estimates.
Economists predict that the debt-to-GDP ratio, currently at 63%, is much lower than that of France and Italy. Although German stocks have skyrocketed, the lowest borrowing costs in the eurozone since the 1990s have jumped the most since the 1990s as investors adapted to Berlin’s new audacity.
The new package accelerates the already ongoing industrial shift since resignation in 2022 Prime Minister Olaf Scholz established a special 100 million euro military fund in 2022, triggered a full-scale invasion of Russia’s Ukraine. At the time, he described the move as a Zeitenwende (historical turning point) as an approach to his country’s defense and security. Germany is the second largest supplier of weapons to Ukraine behind the US.
The re-registration race could be a much-needed boost for German manufacturing. German manufacturing is struggling with the imports of cheap Chinese steel and automobiles, and the threat of an impending trade war.
Rheinmetall workers will renovate German minor leopard tanks. The weapons manufacturer, which has almost doubled in stock this year, is converting some of its automotive plants into military equipment production ©Hannibal Hanschke/EPA-EFE
German weapons manufacturer Rheinmetall has almost doubled its stock this year, but it has converted some of its automotive part-plants to produce military equipment. Last month, Franco-German tank maker KNDS agreed to take over and convert the train manufacturing plant from Alstom in the eastern town of Gorlitz to produce parts for combat tanks and other military vehicles.
Hensoldt, a state-owned manufacturer of sensors and radar, has hired a team of software engineers from Continental and Bosch, two of Germany’s largest automotive suppliers, to announce more than 10,000 job cuts over the past year.
This week, excitement spread among staff in Baan, Germany. The state rail, known for its late train and failed traffic lights, thought it would receive funds to implement a 53 billion euro renovation plan since the collapse of the Scorts coalition in November.
SPD Defense Minister Boris Pistorius is one of the most vocal supporters of debt brake reform. Germany’s most popular politician wants to remain in his post under a Mertz-led coalition, describing this week’s announcement as “a truly widespread and historic decision,” saying “we are responsible for security not only as Germany, but also to our NATO partners.”
It surprised many in Germany that Mertz, all German politicians, would adjust for such dramatic policy changes. The 69-year-old former senior BlackRock adviser, a stubborn Atlantic in the tradition of post-war prime minister Conrad Adenauer, has built his reputation as a skeptical supply-side conservative of the demand for state intervention.
During the campaign, he vowed to cut taxes, regulations and welfare benefits. He did not rule out reforms to borrowing restrictions, but he argued that budget priorities would be set first and cuts would be decided.
“It’s a typical ‘Nixon Go to Mina’ moment,” says someone close to negotiation.
“You don’t choose the historic moment you live in,” says Sophia Besch, a senior fellow at the European Program at Carnegie’s International Peace Fund, based in Washington. “As a transi-atlantasist, Mertz would not have chosen to become prime minister overseeing divorce from the US.”
Meltz has no choice but to act quickly, his allies argue. His only chance to secure the super majority to pass constitutional amendments is to use a resignation council that can resume until March 25th.
Beyond that date, the far-right alternative for Germany and far-left Dai Linke will be against reforming the debt brake to fund more defensive spending and will enjoy blocking minorities. Meltz still needs to win the green to pass the bill.
“Merz is totally certain that money is needed for defense. I don’t know how much, but I know that from March 25th, a minority of Putin-friendly parties can stop all sorts of defense money for a foreseeable future.” “Only the Social Democrats and Green can become allies, and you have to pay. The 500 billion euro fund for infrastructure is the price.”
Merz managed to seal the defence agreement with the SPD ahead of a meeting of EU leaders in Brussels on Thursday. As Prime Minister, he was not officially able to attend the rally. It is designed to coordinate the Bullock’s response to Trump’s efforts to negotiate a settlement with Russian President Vladimir Putin against Ukraine.
However, Merz stole the show and flew to the Belgian capital the day before, meeting NATO chief Mark Latte, EU diplomatic principal Kaja Karas and European Commission’s Ursula von der Leyen.
He said on Thursday in Brussels when asked about government discussions with the SPD on the bystanders of a meeting of European Central Right leaders. . . When you’re going to spend money! ”
Mertz, left, along with NATO Secretary General Mark Latte of Brussels on Wednesday. German stocks have skyrocketed after CDU-SPD trading, but the country’s borrowing costs have jumped the most since the 1990s © NATO/DPA
But back at home, Meltz faces two weeks of unwieldy legislative hurdles and institutional obstacles.
“A lot of people are very skeptical,” says senior commander Vandeswale. Addressing these issues “it’s not going to take months, it’s going to take years,” he said.
The Merz package includes plans to overhaul defense procurement. But Christian Merling, European director of the Bertelsmann Foundation, a think tank, says spending far more money on enacting structural reform is like having a heart surgery. “While it pumps you’re trying to change something too. That’s a lot of stress.”
The same logic applies to infrastructure projects, says Jens Südekum, a professor of economics at Heinrichheine University in Dusseldorf. Policymakers not only needed to allocate money wisely to maximize their growth impact, but also needed to speed up implementation.
This grand union is eager to prove that this is a new start
There may be more immediate political obstacles. Furious at Meltz’s sudden conversion, the Greens decided to sweat after years of opposing calls for debt brake reform, and announced intense negotiations until the old aisles were redisclosed next week.
However, most analysts expect Green to support the package in exchange for assurance that some of the money is heading towards the green transition.
Another challenge with CDU/CSU and SPD is re-mobile all outgoing MPs who may have few incentives to adhere to party discipline when it comes to attending or voting.
Hoyer believes that increased pressure from Trump outside, from the inside to the right and left, would likely unite mainstream German parties.
“This epic coalition, which is no longer grander, is keen to prove that this is a new start,” she says. “We are very aware that domestically they have only had four years, and if they don’t do anything, AFD and Die Linke will probably increase (their support).”
Additional reports by Patricia Nilsson of Frankfurt and Ben Hall of Brussels
Data visualization by Keith Frey
