Germany is poised to shift away from its austerity measures, with a significant financial package aimed at boosting defense and infrastructure investments, pending approval from the Bundesrat on March 21, 2025.

On March 18, 2025, the governing coalition of Union, SPD, and Greens is expected to approve a multi-hundred billion euro financial package that targets infrastructure, climate protection, and military spending, all previously limited by budget cuts.

This financial package marks a significant policy shift away from Germany's traditional fiscal conservatism, as it seeks to relax the debt brake that has constrained federal borrowing.

The debt brake, which limits federal borrowing, is viewed as a hindrance to necessary investments for the future, prompting calls for its relaxation.

A majority of economists support suspending the debt brake, believing that increased borrowing is essential for funding critical projects amid ongoing economic challenges.

If approved, the package will increase defense spending to three percent of GDP, resulting in an additional €65 billion annually and the potential creation or safeguarding of 660,000 jobs across Europe.

The financial package allows for up to one trillion euros in additional debt for defense, while a special fund of 500 billion euros for infrastructure will be financed through loans over the next twelve years.

The final approval of the financial package hinges on the Bundesrat's decision, which faces its own set of challenges.

Following the announcement of the financial package, yields on ten-year German government bonds have risen sharply, raising concerns about increased borrowing costs and inflation risks.

Increasing debt is projected to lead to higher interest costs, with estimates suggesting an increase in annual interest payments by €37 billion from 2035, posing long-term economic risks.

Experts suggest that a temporary suspension of the debt brake could provide the necessary resources for recovery without jeopardizing long-term fiscal health.

Marcel Fratzscher, head of the German Institute for Economic Research, views the debt package as a pivotal moment for Germany, emphasizing that funds should be directed towards infrastructure and security rather than merely increasing public sector wages.