Future German rulers have amended the country’s constitutional “debt brake” to promote defence spending. However, by limiting the revision to military spending, they are wasting the opportunity to invest in the country’s economic future.
Berlin – For the first time in decades, Germany is being raised. In ongoing talks to form a coalition government, the hosts (CDU) and the Social Democrats (SPD) (first and third parties in Bundestag) after the federal election in February agreed to exclude military spending more than 1% of GDP from the constitutionally engraved “debt savings” that limit financial obligations. The change, passed by Congress in the Green Party vote, marks a moment of turning point in Germany’s fiscal policy and creates path dependencies for years to come.
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From an economic standpoint, CDU, SPD and Greene have a lasting commitment to military Keynesianism. Whatever form of the next German government, we can use the debt financing fiscal package to increase spending on drones, guns and tanks without restrictions. This is an unprecedented development in the country where political culture has long treated fiscal deficits as a dislike. In 2009, Bundestag introduced the debt brake to limit the structural deficit from 2016 to just 0.35% of GDP.
The shock of President Donald Trump’s second administration has serious doubts about America’s commitment to collective defense within NATO – was so severe that it undermined the harsh financial mercy that has emerged on the debt brakes. The problem is that the new outlook will mainly be extended to military spending, only in very modest ways to infrastructure and climate investment. When it comes to the rest of the economy and society, austerity still appears to be in place.
The embrace of military Keynesianism therefore represents an implicit decision on ambitious climate protection, which has become a secondary issue. However, the fight against climate change has been delayed for a long time, and Trump’s reelection makes it more important than ever for Europe and Germany to take on leadership roles.
Green transformation requires green Keynesianism, but the debt brake amendment focuses on increasing military spending. It promotes sectors known for its intensive consumption of fossil fuels and effectively provides permanent subsidies to internal combustion engine vehicles. Germany produces more tanks and military airlines, but fewer electric vehicles and wind turbines. Rheinmetall has already announced that existing automotive plants can be revived for military vehicle production.
Some economists claim we can have both – more tanks and more EVs. As a rule, this is certainly true. As Germany has unused production capacity, the expanded fiscal policy should significantly increase overall economic outcomes. However, a significant increase in domestic EV and wind turbine production occurs only when expanded fiscal policies promote these commodities. If fiscal spending is heavily skewed into military production of fossil fuels, the opportunity to build a green (cleantech) industry is wasted, as in the case of current changes in fiscal rules.
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Many have fixed their wishes on public investment funds that are part of Germany’s fiscal reforms, allowing 400 billion euros ($436 billion) and 100 billion euros of deficit spending for green investments over the next 12 years. Of course, it is perfectly wise to increase the room for credit financing investments in energy and transportation infrastructure. Additional funding for clean technology investments is also a step in the right direction. However, the green industrial policy is only 8.33 billion euros a year, making Germany unable to maintain its transition to a green economy in the long term.
It helps you look at some numbers to understand the big imbalances. If defense spending reaches the current target of 3% of annual GDP, under the new rules, military spending of 2% of GDP can pay the debt. In contrast, deficit spending on infrastructure investments is limited to 0.8% of annual GDP, and for climate investments, the limit for deficit is only 0.2% of annual GDP. Some trade-offs cannot be denied, and this strong financial bias clearly leads to substantial reallocation of resources and production from green technology to the military sector.
The recent energy crisis in Europe has already demonstrated that rising energy prices can divide society and regain climate targets. Without green industrial policy and ambitious green Keynesianism, Germany’s climate strategy would be limited to carbon pricing and regulations. The two mechanisms will unpopularize climate protection, falling into the hands of fossil fuels and political extremists.
Support for German far-right alternatives could be further increased if voters believe that they are forcing the government to force the burden of green transitions while they spend unlimited amounts of money on defense. Military spending doesn’t know about financial restrictions, but social benefits and support for parental leave are already in the chopping block. This is supposed to be fuelled by the frustration and support on the far right. The consequences would equally put national security and climate objectives at risk.
