Germany Unveils Historic “Whatever It Takes” Fiscal Package, Sending Swap Spreads Crashing Ahead Of Debt Avalanche

The leaders of CDU/CSU and SPD this evening announced an agreement on an even more significant fiscal expansion than what anyone had expected at the beginning of the week. The plan is to make three material changes to the debt brake in the very near term, convening the outgoing parliament in which the centrist parties still hold a constitutional majority:

• A EUR 500bn (11.6% of GDP in 2024) special purpose off-budget vehicle for infrastructure investment, that is planned to be disbursed over the next 10 years, and which amounts to roughly 1% of GDP in annual infrastructure spending (of which EUR 100bn will be allocated to the federal states).
• A reform of the debt brake to exempt any defense spending in the main budget’s “Einzelplan 14”, the budget of the Ministry of Defence, over and above 1% of GDP, effectively permitting open-ended borrowing for defense. Currently the Einzelplan 14 amounts to EUR 53.25bn (1.25% of nominal GDP in 2024). The current off-budget fund adds another EUR 25bn of defence funding but this would not be relevant for this part of the proposal. Thus apart from removing any constitutional limit on additional defence spending, 0.25% of GDP (EUR 11bn) of spending in Einzelplan 14 that surpasses the 1% threshold is freed up to fund other measures, for example tax reductions.
• An increase in the structural deficit allowed for the states (Länder) from the current level of 0.0% of GDP to 0.35%, the same proportion as the federal level. Furthermore the proposal includes the formation of an expert commission tasked with creating a long-term reform proposal to structurally reform the debt brake by the end of 2025. This would have to be passed by the newly elected 21st Bundestag. It remains unclear if this reform proposal would supersede the announced measures to be passed in the 20th Bundestag or would add to them.

All elements require a two-thirds constitutional supermajority. The parties want to pass the agreed measures with the old 20th Bundestag parliament, before the newly elected 21st Bundestag (where the AfD has a potential blocking minority) is convened on March 25.