Bloomberg: Germany backs fiscal rule reform to fund military expansion

Germany has called on the European Union to reform its fiscal rules to allow member states to significantly boost defence spending without violating the bloc’s budgetary constraints, sources familiar with the discussions revealed.

During a closed-door meeting in Brussels on March 5, a German envoy stunned EU counterparts by urging the bloc to create additional budgetary flexibility for defence-related expenditures, citing the current geopolitical climate. People familiar with the matter told Bloomberg that Germany’s stance marks a stark departure from its previous fiscal conservatism.

EU leaders are set to deliberate on potential changes to fiscal rules during a summit on March 6. A spokesperson for the German government in Brussels declined to comment on the proposal.

Germany’s shift in fiscal policy

Germany’s push comes as the EU scrambles to mobilize trillions of euros to counter the threat of Russian aggression and to compensate for US President Donald Trump’s decision to scale back Washington’s security commitments to Europe.

On Tuesday, Friedrich Merz, Germany’s incoming chancellor, announced that the government would amend the constitution to exempt defence and security expenditures from fiscal spending limits. “We will do whatever it takes to defend the country,” Merz declared.

In addition, he revealed plans for a €500 billion ($528 billion) infrastructure fund over the next decade, aimed at modernizing transportation, energy grids, and housing.

Impact on European markets and EU policy

The announcement had an immediate impact on European financial markets, with government bond yields rising. The yield on 10-year Italian and French debt reached session highs on Wednesday, climbing by approximately 20 basis points. The surge followed Germany’s fiscal announcements, which also strengthened the euro.

Berlin’s shift places pressure on the EU’s other 26 members ahead of Thursday’s summit, where leaders will discuss ways to expand military budgets. Historically, Germany has been a strong advocate of fiscal discipline, making its reversal a potential game-changer for European defence policy.

The summit is expected to endorse a mechanism that would allow additional defence spending over the next four years. On March 4, the EU also unveiled a plan that could unlock €800 billion in additional national defence spending, including €150 billion in EU loans for military investments.

However, during Wednesday’s discussions, the German envoy argued that these measures were insufficient. “The current proposals are only short-term solutions. We must explore ways to permanently adjust the fiscal rules,” said the official, who spoke on condition of anonymity.

Breaking from past fiscal stances

Under existing EU regulations, member states must keep debt below 60% of GDP and budget deficits under 3% of GDP. Germany has traditionally been a key proponent of strict fiscal oversight, often aligning with fiscally conservative nations like the Netherlands. However, Dutch officials reportedly reacted coolly to Berlin’s sudden policy shift.

The shift in Germany’s approach was first hinted at by outgoing Chancellor Olaf Scholz during last month’s Munich Security Conference. At the time, he proposed a temporary exemption within the EU’s Stability and Growth Pact to allow defence investments beyond the NATO-mandated 2% of GDP target. “Germany is prepared to do this,” Scholz stated on February 15.

Since then, tensions between Europe and the US have escalated further, with the Trump administration halting military aid to Ukraine.

Germany’s domestic political landscape

Faced with growing security concerns, Friedrich Merz — who won the national election on February 23 — secured an agreement with Scholz’s Social Democrats on March 4 night to amend Germany’s constitution. The change will allow defence and security outlays to bypass existing fiscal constraints.

On March 5 morning, Merz met Scholz at the chancellery to discuss the political ramifications of the new debt package. Scholz also held a phone call with Ukrainian President Volodymyr Zelenskyy, reaffirming Germany’s commitment to providing military support.

Both Scholz and Merz will travel to Brussels on March 6. The incoming CDU leader is expected to attend the European People’s Party meeting, while Scholz will participate in the EU leaders’ summit, where the proposed fiscal rule changes will be a key topic of discussion.

As the EU faces mounting security challenges, Germany’s newfound advocacy for increased defence spending marks a turning point that could reshape the bloc’s fiscal and military policies.

By Tamilla Hasanova