Berlin, March 5 (Reuters) - Parties aiming to shape Germany's next government have reached an agreement to establish a 500 billion euro infrastructure fund and revise borrowing regulations in a major spending adjustment aimed at modernizing the military and revitalizing economic growth in Europe's largest economy.
The conservatives led by Friedrich Merz and the Social Democrats (SPD), currently in talks to form a coalition following last month's national election, plan to present their proposal to the German parliament next week.
Merz, expected to be Germany's next chancellor, has responded to the recent changes in the White House by highlighting the necessity for Europe to strengthen its defenses, as uncertainties in the transatlantic alliance have surfaced.
The decision to reform Germany's constitutionally bound borrowing limits, known as the "debt brake," is seen as crucial to bolster investment and support an economy that has experienced a downturn for the past two years, following rules implemented after the 2008 global financial crisis that are now deemed restrictive.
"In view of the threats to our freedom and peace on our continent, 'whatever it takes' must now also apply to our defense," stated Merz, leader of the CDU/CSU conservatives.
The plan has triggered a surge in the euro and Euro zone bond yields, with upticks also reflected in Germany's blue-chip share index and European defense company shares.
Reacting to the proposed changes, economist Holger Schmieding described them as a significant shift for Germany, anticipating their prompt implementation as a move that could substantially alter Germany's fiscal landscape.
The proposed motions include amending the constitution to exclude defense expenditures above 1% of economic output from the debt brake, while a group of experts will draft a plan for a lasting modernization of the debt brake to enhance investments.
Public opinion in Germany seems inclined towards relaxing the debt brake, yet altering the debt regulations requires a two-thirds majority in parliament, prompting the conservative and SPD parties to expedite their efforts in the current legislative term.
In response to the developments, various political parties, including the far-right and far-left, are assessing the proposed changes closely, underscoring the potential impact on Germany's economic and defense capabilities.
The urgency to invest significantly in the country's upkeep was emphasized by SPD leader Lars Klingbeil as essential for its continued function and growth.
The pending discussions with outgoing SPD Chancellor Olaf Scholz are expected to address additional assistance for Ukraine, emphasizing Germany's commitment to providing substantial support where needed.
The United States' call for Germany to enhance its military spending to update its defenses and aid Ukraine in its conflict against Russia has played a role in shaping these decisions, with experts recognizing this as a pivotal moment in postwar German history.