Germany Clears €110 Billion Defence Borrowing

Friedrich Merz has done what German chancellors were once expected to avoid. His cabinet has approved a 2027 draft budget that would put Germany in the market for roughly €203.6 billion in new borrowing, with €109.7 billion set aside for the military (SPIEGEL, RTE). On those numbers, Germany would become the eurozone's biggest single-year borrower.

For the rest of Europe, the borrowing itself is only half the story. The more important point is how Berlin made it possible. Germany has rewritten its own fiscal rules to allow a military spending surge. Most of its partners cannot pull the same lever.

How Germany borrows outside its own rules

Total federal spending is planned at €555.4 billion. The ordinary federal budget needs €118.7 billion in new borrowing to close the gap between tax revenue and planned spending. Alongside it sit two additional pots: about €54.9 billion from an infrastructure fund and €30 billion from the defence fund created in 2022 (DW).

Those "special funds" are doing the heavy lifting. They allow the government to keep the regular budget looking more restrained while borrowing heavily through channels outside the normal budget line. Germany's constitutional debt brake, the rule that limits annual federal borrowing after adjusting for the economic cycle, has been changed to exempt defence spending above 1% of GDP. That one legal adjustment gives Merz the room to aim for 3.5% of GDP on defence by 2029 (Bundesregierung).

The bill does not stay tidy for long. Interest payments on federal debt are projected to almost 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, which monitors borrowing by the federal government and the Länder, has warned that the path risks breaching EU debt rules (Handelsblatt).

Borrowing for itself, austerity for the club

At the same time, Berlin is pressing for the next EU budget to be cut by roughly €400 billion, according to a leaked position paper reported by Marketscreener. That budget pays for cohesion funding, agriculture and climate programmes, particularly in poorer member states. In plain terms, Germany has altered its own fiscal constitution so it can spend more on defence, while asking partners to take less from the shared European pot.

France is caught in the sharpest bind. Paris has committed to €436 billion in military spending through 2030, but French public debt is already about 117.5% of GDP, with interest costs expected to approach 5% of GDP over the long term (Le Figaro, Le Monde). Germany found fiscal space by rewriting one constitutional clause. France has no matching release valve and must keep refinancing inside much narrower limits.

The bond market tells the same story in quieter language. Germany's 10-year Bund yield was about 2.94% on 6 July; Italy's equivalent was 3.71%, a spread, meaning the extra cost Italy pays to borrow, of 77 basis points (Borsa Corriere, Teleborsa). That gap has narrowed, which might look like relief for Rome. It is not quite that. The spread narrowed because German borrowing costs went up, not because Italian debt became cheaper. BNP Paribas has made the broader point: structurally higher rates are increasing the debt burden across advanced economies (BNP Paribas).

What the money actually buys

NATO Secretary General Mark Rutte has urged Berlin to turn the spending into combat-ready forces and functioning production lines, rather than impressive numbers in a budget document (NATO). That is the real test.

Germany has the balance-sheet capacity to drive European rearmament. Its allies, including countries such as Ireland that watch EU defence integration with particular caution because of military neutrality, will want to know what this borrowing actually delivers. The answer has to be deployable brigades, air-defence batteries and ammunition reserves, not higher unit costs and more imported kit. Whether France and smaller member states can keep pace without more shared EU financing is the question Germany's budget leaves hanging.