Concerns Raised Over Special Fund Agreement Amid Economic Risks

In light of escalating geopolitical tensions, particularly regarding threats to Ukraine, a significant agreement has emerged between the CDU and SPD in Germany. This agreement centers around the establishment of a special fund intended to channel substantial investments into infrastructure and defense. However, this initiative has attracted considerable criticism from economic experts who caution against the potential for a debt spiral.

The CDU's Economic Council has voiced strong objections to the proposed financial framework for the special fund. Wolfgang Steiger, the Secretary General of the Economic Council, has expressed concerns that embedding this special fund in the constitution could lead to profound missteps, particularly if investments are executed within existing inefficient structures. He emphasized that while financial resources are critical for sustainable infrastructure development, streamlined and efficient processes are equally important. He urged for comprehensive reforms to avoid substantial waste of resources.

Steiger highlighted that the proposed increase in defense spending through borrowing may be justifiable, but this rationale does not extend to the infrastructure fund. Earlier in March, he had already articulated similar reservations regarding the defense budget, suggesting that it should only be considered a temporary, purpose-specific solution. He reiterated the necessity for significant structural reforms to foster economic growth and urged for private investments to be more thoroughly integrated into the infrastructure sector.

The CDU and SPD have recently reached a consensus on two major economic strategies in response to the shifting geopolitical landscape. Firstly, they have proposed a special budget amounting to 500 billion euros aimed at enhancing infrastructure. This initiative, reaffirmed on March 8 following discussions between the parties, is designed to support extensive investments across various sectors including civil protection, transportation infrastructure, healthcare facilities, energy, and education.

Secondly, the agreement addresses defense spending, proposing that all military expenditures exceeding one percent of the Gross Domestic Product (GDP) be exempt from existing debt brake limitations. This measure was announced by Friedrich Merz, the leader of the CDU and a likely candidate for future Chancellor. He underscored the pressing need to prioritize defense spending in light of contemporary threats to freedom and peace in Europe.

Steiger has also pointed out that the proposed defense budget could risk plunging Germany into a cycle of increasing debt. If all defense expenditures above one percent of GDP are excluded from debt constraints, it could result in substantial overspending. He warned that if Germany commits to defense spending of three percent of GDP in the coming years, it would necessitate significant deficit financing, potentially surpassing the nation's growth capacity and leading to an inevitable debt spiral.

To mitigate these risks, Steiger advocates for a clearly defined timeframe for such measures, cautioning that otherwise, the defense budget could undermine the foundational principles of the debt brake. He characterized a scenario of perpetual structural deficits as incompatible with the tenets of a social market economy.

According to a recent study, the special fund for infrastructure is projected to significantly boost the German economy starting in 2026, with estimates from the German Institute for Economic Research (DIW) suggesting an increase in economic performance by one percent, and further growth of over two percent annually by 2027.