Germany’s parliament has approved a substantial increase in government spending, marking a significant departure from its traditionally cautious fiscal policies.
The move is intended to stimulate economic growth and enhance military capabilities in response to evolving security concerns in Europe.
The Bundestag’s approval on Tuesday paves the way for the incoming chancellor to access hundreds of billions of euros for investment, following two years of economic contraction in Germany, the largest economy in Europe.
The proposal is now set to proceed to the Bundesrat, the upper house of parliament, for final approval.
European nations, including Germany, have been under increasing pressure to strengthen their defences due to heightened tensions with Russia and uncertainty over United States foreign policy under President Donald Trump.
The conservative bloc led by Friedrich Merz, alongside the Social Democratic Party (SPD), is advocating for a €500 billion (A$849.9 billion) fund dedicated to infrastructure improvements and security investments.
The plan also includes relaxing constitutional borrowing restrictions to accommodate higher spending levels.
"We have for at least a decade felt a false sense of security," Merz told lawmakers before the vote. "The decision we are taking today on defence readiness ... can be nothing less than the first major step toward a new European defence community, which also includes countries that are not members of the European Union."
A key obstacle to the legislation’s passage appeared to be removed on Monday when Bavaria’s Free Voters agreed to support the proposal.
The governing coalition sought to pass the law before the new Bundestag convenes on 25 March, anticipating that an increase in far-right and far-left representatives could complicate its approval.
Merz justified the swift action by pointing to growing geopolitical instability. "Europe stands today next to an aggressive Russia on one side and an unpredictable United States of America on the other side," he warned.
The financial markets have already responded to the spending initiative. Eurozone bond yields, the euro, and European stock markets have risen in recent days, reflecting investor optimism.
European allies welcomed the decision. “It sends a very clear message to Europe that Germany is determined to invest massively in defence,” said European Commission President Ursula von der Leyen.
Danish Prime Minister Mette Frederiksen echoed the sentiment, saying, "As a neighbouring country it's fantastic news because we need a strong Europe."
The move also marks a major shift in Germany’s fiscal approach, easing borrowing restrictions introduced after the 2008 financial crisis. These rules have long been criticised for limiting economic flexibility.
Merz comfortably secured the required two-thirds majority in the Bundestag, with 513 lawmakers in favour and 207 opposed. However, some critics within his party accused him of reversing his campaign promise of fiscal restraint.
Economists have also warned that additional reforms will be necessary to sustain economic growth, including reducing bureaucratic obstacles.
Meanwhile, Fitch Ratings cautioned that Germany’s coveted AAA credit rating could be at risk in the long run if the increased spending is not counterbalanced by fiscal consolidation or fails to generate lasting economic improvements.
