The €500bn plan to restore Germany’s army and bring peace to Europe

When Lehman Brothers collapsed in 2008, Chancellor Angela Merkel quipped that “one should have just asked a Swabian housewife…she would have told us that you cannot live beyond your means”.

The jibe, referring to thrifty southerners who run their households on a tight budget, became emblematic of German frugality and a deep aversion to racking up government debt.

But times have changed. On Tuesday night, incoming chancellor Friedrich Merz announced a €500 billion (£414 billion) special fund for German infrastructure and an end to strict borrowing limits on defence spending.

Speaking on Tuesday night, Mr Merz said: “I want to make it very clear: in view of the threats to our freedom and peace on our continent, the following must now also apply to our defence: ‘Whatever it takes’.”

While that half-a-trillion euro package for infrastructure is a big borrowing pledge, the reform to defence spending limits could prove much more significant for European security.

Since the financial crisis, German governments have laboured under its famous “Schuldenbremse”, or debt brake, a strict limit on government borrowing which has hampered efforts to strengthen the Bundeswehr, the German military.

Mr Merz now wants to make defence spending above 1 per cent of GDP exempt from the debt brake. In theory, that means the sky would be the limit for how much Germany spends on defence; the only constraints would be political.

This is a historic moment for German fiscal policy, and a particularly bold move for Mr Merz, a Right-winger whose Christian Democratic Union (CDU) has always been allergic to debt – most famously so under Mrs Merkel herself.

But fears that Europe can no longer rely on Donald Trump for security have forced Mr Merz and other EU leaders to seek creative ways to find more cash to support its armies.

It came as Ursula von der Leyen, the European Commission president, issued a parallel pledge of an €800 billion (£663 billion) increase to EU defence spending. Mrs von der Leyen said the “ReArm Europe” strategy reflected her conviction that “the stakes could not be higher and the time for action is now”.

Britain has vowed to increase defence spending to 2.5 per cent of GDP, albeit only from 2027 onwards. Emmanuel Macron has urged EU allies to reach a target of three per cent of GDP on defence spending.

Meanwhile, shares in EU defence firms such as Rheinmetall, the German tank and artillery producer, are already rising as arms manufacturers brace for a surge in demand.

Germany’s aversion to debt is the stuff of legend, perhaps best captured by the double meaning of the word itself in German, “Schuld.” Depending on the context, it can mean either “debt” or “guilt”.

Germany’s intense allergy to debt can partly be traced back to bitter memories of the reparations-induced poverty of the Weimar Republic era, which in turn fuelled the rise of the Nazis.

But their spendthrift nature arguably dates back even further, to the aftermath of the Franco-Prussian war, which ended in France paying out 120 million gold marks to Germany in 1871.

Treasure chests

Instead of investing those reparations, the German victors stashed much of the gold away in treasure chests inside the Juliusturm tower of Spandau Citadel – where they were left untouched for the next four decades.

The phrase “Juliusturm” has been known ever since as a colloquial term for guarding a massive state surplus of funds.

If Mr Merz follows through on his Tuesday announcement, that somewhat miserly streak in the German fiscal psyche is now truly a thing of the past.

The next step is a crunch vote in the Bundestag, the German parliament, to approve the infrastructure fund and the lifting of the debt brake on defence investments.

This vote will take place under the current, pre-election makeup Bundestag, where Mr Merz should be able to secure the two-thirds majority required to pass amendments to Germany’s constitution.

Dr Maximilian Terhalle, a German political scientist at Stanford University, said Mr Merz’s ambitions on defence spending should be taken “very seriously” as they reflect his view that Russia now poses an “unprecedented” challenge to Europe.

“Merz’s threat perception is deeply strategic, in that it views Russia as a ruthless revisionist power intent on re-erecting its empire,” he said.

“It views Russia, therefore, as an actor that can be trusted to break any treaty as it sees fit, and [Merz] realizes the unprecedented challenges, that a decreasing commitment of the US to Nato’s Article 5 could have serious implications.”

Russian aggression

Article 5 of Nato states that an attack on any Nato member is an attack on them all, and forms the alliance’s strongest non-nuclear deterrent against Russian aggression.

Mr Merz is still locked in negotiations on forming a new coalition with the SPD, following last month’s elections. That is often a drawn-out affair in Germany that can take months to finalise.

But the relative ease with which he has agreed on a defence package with the SPD bodes well for the rest of the negotiations. Perhaps Mr Merz will meet his floated Easter deadline for a new coalition after all.

“We are aware of the scale of the tasks ahead of us,” he said on Tuesday night. “We want to take the first necessary steps with today’s decisions.”

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