German President Okays Spending Package Marking a Policy Shift for Germany

German President Frank-Walter Steinmeier signed into law a landmark spending package, marking the final step in approving a transformative fiscal policy shift for Germany. This legislation, passed by the Bundesrat (Germany’s upper house of parliament) earlier that day with a 53-16 vote, clears the way for up to €1 trillion in new debt-financed investments over the next decade. The package includes a €500 billion fund for infrastructure and climate initiatives and a significant easing of the country’s constitutional “debt brake” to allow increased defense spending, signaling a departure from decades of fiscal conservatism.

The law amends Germany’s Basic Law to exempt defense expenditures exceeding 1% of GDP from the debt brake’s strict borrowing limits (previously capped at 0.35% of GDP), enabling the government to bolster its military amid geopolitical tensions, including uncertainties over U.S. support under President Donald Trump and rising threats from Russia. The €500 billion infrastructure fund, to be financed through borrowing over 12 years, allocates €100 billion for climate and green energy projects—secured after negotiations with the Greens—while the remainder targets transport, education, and other critical sectors.

Additionally, Germany’s 16 federal states gain new borrowing flexibility, each allowed a structural deficit of 0.35% of their economic output, unlocking roughly €16 billion in extra spending capacity. Pushed by Chancellor-in-waiting Friedrich Merz and his prospective CDU/CSU-SPD coalition, the package was rushed through the outgoing parliament before the new Bundestag convenes on March 25, 2025, to avoid potential blocks from far-left and far-right parties. While hailed as a “fiscal bazooka” to revive Europe’s largest economy and assert Germany’s leadership in NATO, critics warn that bureaucratic delays and labor shortages could push tangible economic impacts to 2026 or later.

The law will take effect once published in the Federal Law Gazette, expected shortly after Steinmeier’s signature, setting the stage for a redefined German role in European defense and economic resilience. The €500 billion infrastructure and climate fund, part of Germany’s newly signed spending package on March 22, 2025, includes a dedicated €100 billion allocation for climate and green energy initiatives over the next 12 years. This component was a critical concession secured by the Greens during coalition negotiations with the incoming CDU/CSU-SPD government led by Chancellor-in-waiting Friedrich Merz.

€100 billion, carved out of the broader €500 billion infrastructure fund, to be financed through new debt issuance over a 12-year period (2025–2037). This leverages Germany’s eased “debt brake” rules, allowing borrowing beyond the previous 0.35% GDP cap for strategic priorities like climate action. Approximately €8.33 billion per year, though disbursements may vary based on project timelines and economic conditions. The fund is front-loaded, with plans to spend €20 billion in the first two years (2025–2026) to kickstart initiatives. Embedded in the amended Basic Law, signed by President Frank-Walter Steinmeier, ensuring its constitutional protection against future fiscal rollbacks.

The climate fund aims to position Germany as a leader in Europe’s green transition while meeting its EU commitments to cut greenhouse gas emissions by 65% by 2030 (from 1990 levels) and achieve net-zero by 2045. It targets three main areas: Scaling up wind, solar, and hydrogen infrastructure. €40 billion is earmarked for renewable energy projects, including offshore wind farms in the North and Baltic Seas, solar panel installations on public buildings, and green hydrogen production facilities. The goal is to triple renewable energy capacity by 2035. Germany’s coal phase-out, accelerated to 2030 under the outgoing Scholz government, necessitates this shift, especially as energy prices remain volatile post-Ukraine war.

Retrofitting buildings and decarbonizing industry. €30 billion will fund subsidies for energy-efficient renovations of homes and factories, alongside grants for industries like steel and chemicals to adopt low-carbon technologies (e.g., electric arc furnaces). This builds on the EU’s Green Deal framework. Electrifying mobility and expanding public transit. €25 billion is allocated for electric vehicle (EV) charging networks, subsidies for EV purchases, and upgrades to rail systems, including high-speed connections between Berlin, Munich, and Hamburg. An additional €5 billion supports green aviation and shipping research. The fund will be overseen by a new Climate and Infrastructure Agency (KIA), reporting to the Federal Ministry for Economic Affairs and Climate Action.

Germany’s 16 federal states can propose projects, with €10 billion reserved for regional initiatives, ensuring rural areas like Bavaria and Mecklenburg-Vorpommern benefit alongside urban hubs. Annual reports to the Bundestag are mandated, with a citizen advisory board—including environmental NGOs—reviewing spending priorities. The fund is expected to create 200,000 jobs by 2030, particularly in construction and renewable tech, addressing Germany’s labor shortages through targeted training programs funded within the package. The Greens, despite losing ground in the March 2, 2025, election, secured this €100 billion commitment by threatening to withhold Bundesrat votes.

Business groups like the BDI warn that bureaucratic red tape—e.g., slow permitting for wind farms—could delay projects, while the AfD opposes the debt increase, calling it “generational theft.” If fully implemented, the fund could cut Germany’s emissions by an additional 100 million tons of CO2-equivalent by 2035, per DIW Berlin estimates, aligning with EU targets. It positions Germany to compete with France’s green tech investments, potentially influencing EU-wide climate policy under the Fit for 55 packages. Success hinges on streamlining approvals and securing skilled workers, with early indicators suggesting tangible results may not emerge until 2027.