Germany urges EU to change fiscal rules to increase defense spending
Germany proposes that EU countries change their approaches to increase defense funding (photo: Getty Images)
Germany has urged the European Union to reform its fiscal rules to allow countries to spend more on defense. This is a significant shift for the country, known for its restrictions on spending for such purposes, according to Bloomberg.
The German ambassador to the EU shocked his colleagues in Brussels on Wednesday, March 5, by calling on the bloc to provide member states with additional budgetary space to increase defense spending in the long term, given the geopolitical circumstances. EU leaders are expected to discuss possible changes to the EU's fiscal rules during a meeting on Thursday, March 6.
The European Union and its member states are rushing to mobilize trillions of euros in additional funds for defense to counter the threat of Russian aggression and to compensate for the sharp shift in US President Donald Trump's administration's commitments to European security.
European government bonds continued their decline following the report, as investors prepared for additional issuance. The yields on 10-year Italian and French debt reached session highs and increased by about 20 basis points each on Wednesday. This came after Germany's late statement on Tuesday regarding the budget increase, which led to a sharp rise in yields and the euro's exchange rate.
Germany's future chancellor, Friedrich Merz, announced on Tuesday that the government would amend the Constitution to exempt defense and security spending from budgetary restrictions and would do everything possible to protect the country.
He stated that with the support of his likely coalition partners, he also plans to create a €500 billion ($528 billion) infrastructure fund to invest in priorities such as transportation, energy networks, and housing construction over the next 10 years.
Changing the rules of the game
Changes in Berlin are challenging the other 26 EU members ahead of their Thursday meeting to discuss how to increase military spending across the bloc. Since Berlin has traditionally been firmly opposed to increasing expenditures, this shift could be a game-changer for European defense.
The EU summit on Thursday is expected to approve the launch of a mechanism that will allow defense spending to increase over the next four years. On Tuesday, the EU separately announced a plan that could mobilize up to €800 billion in additional national spending, including €150 billion in EU loans to member states for defense investments.
Bloomberg sources reported that during a closed-door discussion on Wednesday, the German ambassador to the EU stated that the measures currently under consideration are only short-term, and the bloc should explore ways to change fiscal rules for the longer term.
Bloomberg reminded that EU budget rules limit member states' debt to 60% of GDP and the deficit to 3%. Just a year ago, Germany opposed calls for more flexibility in the EU's rules regarding priorities, including defense.
In recent years, Germany has clashed with southern EU member states over budgetary control, aligning with financially conservative countries like the Netherlands, which reacted coldly to Berlin's shift on Wednesday.
Chancellor Olaf Scholz, who is stepping down, first hinted at this change last month during the Munich Security Conference, where he called for EU member states to strengthen their defense capabilities.
"I therefore propose that we introduce an exception in the European Union’s stability pact for all investments in defense equipment that exceed our current NATO target of 2%, for a limited period of time and while maintaining the fiscal solidity of all member states. Germany is prepared to do this," Scholz said on February 15.
Since then, the divide between Europe and the US has deepened, particularly after the Trump administration suspended military aid to Ukraine.
Next steps
Facing this new reality, Merz, who won the national elections on February 23, reached an agreement with Scholz's Social Democrats on Tuesday evening that the government would introduce amendments to the Constitution to exempt defense and security spending from fiscal restrictions.
On Wednesday morning, Merz met with Scholz at the chancellery to discuss the political implications of the debt package. Scholz also had a phone conversation with Ukrainian President Volodymyr Zelenskyy and promised further military support from Germany.
On Thursday, Scholz and Merz will travel to Brussels, where the CDU leader will participate in the European People's Party meeting, while the outgoing Chancellor will attend the EU leaders' summit, where the planned easing of fiscal rules will be discussed.
Financial assistance to Ukraine from the EU
Ukraine is set to receive €50 billion from the EU through the Ukraine Facility program, provided that it adopts legislation aimed at reforming housing laws in the country. This comprehensive framework will regulate all aspects of post-war recovery.
The European Commission and the European Investment Bank are planning to enter into a guarantee agreement worth €1.95 billion. This agreement will support investment programs within the Ukrainian Fund in the EU budget for 2024-2027.
Previously, discussions within the EU have begun regarding an additional financial aid package for Ukraine, although its specifics are not yet known.
