Germany to Scrap Debt Break, Propose €500 Billion Package
If the Germans start adjusting debt rules, it might be time to take Europe's desperation more seriously.
Germany’s economic might is waning. Once the engine of Europe, its economy is contracting, it has fallen behind in AI, and its auto industry is losing ground to U.S. and Chinese rivals. But Germany’s next chancellor, Friedrich Merz, has a plan to reverse the decline.
February’s election delivered a victory for the political center. Merz’s center-right CDU/CSU, in coalition with the center-left SPD, is set to form a traditional Große Koalition or "Grand Coalition."
The task ahead is formidable: reviving the economy, overhauling the military, and reforming migration policy. But Merz is not a conventional leader. A former BlackRock executive, he is positioning himself as Germany’s modernizer, aiming to break free from the fiscal and regulatory constraints that have defined the country’s postwar model.
His first move: scrapping the Schuldenbremse, Germany’s constitutional debt brake, which caps new borrowing at 0.35% of GDP. The proposal—pushed jointly by CDU/CSU and SPD leader Lars Klingbeil—challenges Germany’s deep-seated aversion to public debt.
As a result, global borrowing costs surged, extending a sharp sell-off in government bonds. German bund yields retreated from their highs but remained elevated after a historic spike on Wednesday—their largest single-day jump since reunification 35 years ago.
The yield on Germany’s 10-year government bond soared by roughly 30 basis points after lawmakers from parties expected to lead the next coalition government reached an agreement to amend longstanding debt restrictions.
The proposed reforms would enable increased defense spending, triggering concerns about fiscal loosening and fueling the bond rout. However, if the reforms are passed, it would unlock €500 billion over the next decade for infrastructure, energy, and R&D, reversing years of underinvestment.
But fiscal policy isn’t the only taboo on the chopping block. With war raging in Ukraine and EU-U.S. relations cooling, Merz is pushing for a major defense buildup, vowing to do “whatever it takes” to make Germany militarily self-sufficient.
This means sidestepping EU deficit rules, expanding debt exemptions, and ramping up orders for domestic defense giants like Rheinmetall, Hensoldt, Renk, and Thyssenkrupp, which are already surging in anticipation.
Execution will be a battle. Dismantling the Schuldenbremse requires a two-thirds majority in parliament, meaning the Greens must come on board—fast. Delay risks empowering the AfD and Linke, both of whom oppose the move.
Meanwhile, Germany’s influential conservative press—Bild and Welt—has wasted no time in attacking Merz, accusing him of betraying his base and abandoning fiscal discipline.
Unlike Merkel and Scholz, Merz is moving quickly. But his window is short. If he can push his agenda through before the new parliament is seated, he may reshape Germany’s economic and strategic trajectory. If not, the country’s slow decline will continue.