Overview

• Germany's new coalition government has submitted a formal request to the European Commission for an exception to allow unlimited borrowing for defense spending above 1% of GDP.
• The €500 billion investment package for infrastructure and uncapped defense borrowing could lead to nearly €1 trillion in additional debt over the next decade.
• EU fiscal rules, reformed in late 2023, require countries with debt-to-GDP ratios between 60% and 90%—like Germany at 62.5%—to reduce their debt by 0.5% annually.
• The European Commission faces a complex decision, balancing its support for Germany's increased investment with the need to enforce fiscal discipline across the eurozone.
• A Bruegel think tank study warns that Germany's plans risk breaching EU fiscal rules, raising questions about the credibility of the Stability and Growth Pact.