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In a bold move, Germany has thrown off its fiscal shackles. It has amended its constitutional debt brake, freeing defence and security-related spending above 1% of GDP from the 0.35% of GDP debt limit and creating a €500 billion extra-budgetary fund.  

What looks like good news from a rearmament and infrastructure perspective, on closer inspection, conflicts with European Union fiscal rules. Although the European Commission announced that it will , this additional room for manoeuvre will be of little use to Germany.  

Our Analysis shows that that even in optimistic scenarios, the EU fiscal rules limit German government spending at federal and sub-federal levels. Under any realistic assumptions about defence spending, there will be no space to use the new infrastructure fund, even with the full flexibility offered by the Commission. Germany’s attempt to raise security spending beyond defence spending as defined by the Commission may also create problems.   

This creates a dilemma for Berlin and Brussels. The German government will not be able to use its new domestic fiscal room and the Commission cannot apply special rules to Germany. This is particularly the case in light of the Commission’s negotiation of fiscal structural plans and demands for painful consolidation from some EU countries.  

As we discuss, some means of addressing this problem are cosmetic, others are outright violations of European or German fiscal rules. But the cleanest solution is to reform the EU rules again. It’s unfortunate to adjust the rules when they were only reformed in 2024. But the alternatives – placing an economically unjustifiable constraint on German spending, or letting Germany emerge as the only country that is allowed to break the rules – are even worse.

The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy.