Germany Opens €110 Billion Defence Spigot

Friedrich Merz's cabinet has approved a 2027 draft budget built on roughly €203.6 billion in new debt, with €109.7 billion reserved for the military (SPIEGEL, RTE). That would make Germany the eurozone's biggest borrower in a single year.

For Malta, the point is not only the size of the number. It is the mechanism. Germany has changed its own fiscal rules to make room for military borrowing, while smaller member states remain bound by rules they cannot rewrite on their own.

How Germany borrows outside its own rules

Total spending is set at €555.4 billion. The ordinary federal budget needs €118.7 billion in new borrowing to close the gap between tax revenue and planned expenditure. 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).

These "special funds" are the device that matters. They allow Berlin to keep the regular budget looking more restrained while borrowing heavily through channels outside the normal accounts. Germany's constitutional debt brake, the rule limiting how much the federal government can borrow each year after adjusting for the economic cycle, was changed to exempt defence spending above 1% of GDP.

That single legal change gives Merz space to aim for 3.5% of GDP on defence by 2029 (Bundesregierung). A larger country can create fiscal room by amending its constitution. A micro-state like Malta cannot create the same effect inside the eurozone simply by passing a clever clause in parliament.

The bill rises quickly. 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 states, has warned that this path risks breaching EU debt rules (Handelsblatt).

Borrowing for itself, austerity for the club

Berlin is at the same time pushing to cut the next EU budget by roughly €400 billion, according to a leaked position paper reported by Marketscreener. That shared budget pays for cohesion funds, agriculture and climate programmes across poorer member states.

Cohesion money is not an abstraction in Malta. It has helped finance roads, waste infrastructure, port upgrades and local projects visible from Il-Belt to the villages. Berlin's position is therefore politically simple but fiscally uneven: Germany has loosened its own rules for defence while asking EU partners to accept less from the common 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 route and must refinance itself each year under tighter market and EU constraints.

Bond markets show the pressure spreading. Germany's 10-year Bund yield stood at around 2.94% on 6 July; Italy's equivalent was 3.71%, leaving a spread, the gap between what each country pays to borrow, of 77 basis points (Borsa Corriere, Teleborsa). The gap has narrowed, which at first glance looks helpful for Rome. It is less comforting when the narrowing comes because Germany has become more expensive to fund, not because Italy has become cheaper. As BNP Paribas has noted, structurally higher rates are lifting debt burdens across 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 functioning production lines, not just budget entries (NATO). That is where the numbers meet the security test.

Germany has the financial weight to drive European rearmament. Its allies now need proof that record borrowing produces deployable brigades, air-defence batteries and ammunition reserves, rather than higher unit costs and more imported equipment. For France and smaller member states, including Malta, the unanswered question is whether they are expected to keep pace without a larger shared EU financing instrument.