Germany approves €110 billion in military borrowing

Friedrich Merz's cabinet has approved a 2027 draft budget with roughly €203.6 billion in total new debt, €109.7 billion of it reserved for the military (SPIEGEL, RTE). The scale would make Germany the eurozone's largest single-year borrower. What matters more for the rest of Europe is that Germany rewrote its fiscal rules to make this borrowing possible, and its partners cannot do the same.

How Germany borrows outside its own rules

Total spending reaches €555.4 billion. The core federal budget requires €118.7 billion in new borrowing to cover the gap between tax revenue and planned spending. Two extra borrowing pots sit alongside: roughly €54.9 billion from an infrastructure fund and €30 billion from the defence fund created in 2022 (DW).

These "special funds" are the key device. They let the government report a smaller headline deficit while borrowing heavily through side channels that sit outside the regular budget. Germany's constitutional debt brake (the rule that caps how much the federal government can borrow each year in structural terms) was reformed to exempt defence spending above 1% of GDP. That single legal change gave Merz room to target 3.5% of GDP on defence by 2029 (Bundesregierung).

The cost builds quickly. Interest payments on federal debt are projected to nearly double, from €41.9 billion in 2027 to roughly €80.7 billion by 2030, according to budget projections cited by Upday. Germany's fiscal stability council (the body that monitors federal and state borrowing) has warned that this path risks breaching EU debt rules (Handelsblatt).

Borrowing for itself, austerity for the club

Berlin is simultaneously pushing to cut the next EU budget by roughly €400 billion, according to a leaked position paper reported by Marketscreener. That common budget funds cohesion, agriculture and climate programmes across poorer member states. Berlin has rewritten its own fiscal constitution to spend more on defence while asking EU partners to accept less from the shared pot.

France faces the sharpest imbalance. Paris has committed to €436 billion in military spending through 2030, but French public debt already stands at about 117.5% of GDP, with interest costs expected to approach 5% of GDP over the long term (Le Figaro, Le Monde). Germany opened fiscal room by rewriting one constitutional clause. France has no equivalent option and must refinance each year inside much tighter limits.

Bond markets show the wider pressure. Germany's 10-year Bund yield stood at around 2.94% on 6 July; Italy's equivalent was 3.71%, a spread (the gap between what each country pays to borrow) of 77 basis points (Borsa Corriere, Teleborsa). That spread has narrowed, which looks like good news for Rome. It isn't: the gap closed because Germany's own borrowing costs rose, not because Italy got cheaper. As BNP Paribas has noted, structurally higher rates are lifting the debt burden across all advanced economies (BNP Paribas).

What the money actually buys

NATO Secretary General Mark Rutte has pressed Berlin to turn higher spending into combat-ready forces and working production lines, not just budget entries (NATO). That is the test. Germany has the financial capacity for European rearmament. It owes allies evidence that record borrowing produces deployable brigades, air-defence batteries and ammunition reserves, not rising unit costs and imported equipment. Whether France and smaller member states can keep pace without more shared EU financing is the question this budget leaves unanswered.