On March 14, Germany’s Christian Democratic Union-Christian Social Union, Social Democrats, and Greens agreed to amend the country’s basic law (constitution) to allow the government to spend up to €500 billion over 12 years on infrastructure and virtually unlimited increases in defense spending.
Existing rules limited the government’s new debt to 0.35% of annual gross domestic product (GDP); the amendment would exempt defense spending. This means that defense spending can be expanded virtually unlimited, even as the country’s debt grows.
This is the first time the ‘debt brake’ has been lifted in Germany since it was introduced in 2008 during the US financial crisis.
Germany’s Dax 40 index rose 1.65% and Europe’s Stoxx 600 index rose 1.14% on the news of the agreement. The euro has also gained nearly 4% against the dollar in the past 10 days, recovering most of its losses since Trump’s election last November.
Daniel Hartmann, chief economist at Bantleon, said the amendment is “a major boost and a turning point in German fiscal policy”. “It creates new growth impulses in Germany but also increases the risk of inflation.”
European think tank Euro Intelligence said, “it would amount to a “de facto abolition” of the debt brake” and “noting this would be positive if accompanied by structural reforms to ensure the economic revival were long-lived.”
