Friedrich Merz and the “Sondervermögen” (special fund): An opportunity for Europe?

On the 6th of May, the German parliament (“Bundestag”) elected the conservative Friedrich Merz (CDU) as the country's tenth chancellor in a bumpy and extended session. For the first time in the history of the Federal Republic of Germany, a future chancellor failed to secure the required majority in the first round of voting. As the eyes of Europe's policymakers were thus focused on Berlin, it became clear that Friedrich Merz may struggle to provide Europe with what it expects most from Germany: stability and leadership. Nicola Procaccini MdEP, a close ally of Italian Prime Minister Giorgia Meloni, described the events in the Bundestag on 6th of May as a "small shock". "Germany was once considered a pillar of stability. This is no longer the case," Procaccini said.

Friedrich Merz will now start from a weakened position to lead a coalition of conservatives and social democrats, formerly known as the grand coalition, and face the challenge of leading Germany out of the dire economic situation and zero growth of recent years. The new government and Friedrich Merz personally face high expectations from their European partners. Not only must he get Germany back on the growth track, but Germany must also regain its decision-making power at the European level and put an end to the disunity of the Scholz government, which has repeatedly caused irritation among its European partners. In the recent past, Germany has been one thing above all else on the international stage: absent. It is now up to Friedrich Merz to change this and to find a way out of the indecision that has coined the term "German vote".

The newly elected chancellor has a magic tool at his disposal that was not available to the previous government of Social Democrats, Greens and Liberals: debt on a grand scale, declared as a "special fund" (“Sondervermögen”). While the conservatives still regarded the debt brake as a sacred cow during the election campaign, it didn't take even until the new Bundestag was constituted to announce new debt of 500 billion euros for infrastructure and a de facto exemption of defense spending from the debt brake. The CDU's fear of failure under the constraints of the debt brake, similar to that of the previous government, explains in part the sudden change of direction, which was seen by some CDU voters as a betrayal of conservative fiscal principles. By contrast, many European partners perceived the planned increase in spending as a chance for Germany to get back on track as Europe's economic powerhouse and as an important step towards a continent capable of achieving military sovereignty.

The humiliating treatment of Ukrainian President Volodymyr Selensky in the White House in Washington shortly after the election showed the world the new reality triggered by President Trump. This made it clear to German politicians that Europe has to grow up finally and put European defence on top of its agenda. After decades of austerity, the German army(“Bundeswehr”) is poorly equipped and in need of massive investment. For the Social Democrats, who have been fighting for years for a reform of the debt brake, this was an opportunity. If the debt brake was to be relaxed for the Bundeswehr, additional and civilian investment would also have to be made possible. As a result, Friedrich Merz, who had always been in favor of the debt brake, announced the biggest debt regime for decades even before the new parliament was constituted.The special fund that was then adopted has a volume of 500 billion euros and is to run over a period of twelve years. 100 billion of the fund areearmarked directly for the federal states and municipalities, and a further 100 billion for the KTF. However, the fact that the expenditure agreed for the special fund is spread over twelve years means that in practice only around EUR 41 billion will be available each year from the federal and state governments equalling less than ten percent of the total annual budget (480 bn EUR). At the same time, the need is enormous: the renowned German Economic Institute (iw) estimates the basic need for investment in infrastructure at around 600 billion euros by 2035. In addition, there is a need for investment - especially in energy infrastructure - to meet the obligations arising from the Paris climate protection agreement and the Federal Climate Protection Act, which sets a target of reducing greenhouse gas emissions by 65 percent by 2030 compared to 1990 levels and stipulates mandatory climate neutrality by 2045. The energy transition will require an estimated total investment of EUR 425 billion by 2030 in electricity infrastructure alone. This is equivalent to EUR 53 billion per year, which is in itself already more than is planned in the special fund. In order to ensure a rapid improvement in infrastructure before the end of this decade, the coalition has agreed to release EUR 150 billion from the special fund between 2025 and 2029. The special fund is to be set up througha special law, the so-called Errichtungsgesetz to be passed by the Bundestag. Details or first drafts are not yet known, but according to CDU representatives they will be drawn up quickly. With regard to military spending, the actual extent of the change is not yet clear.

It is certain that federal spending on defense will only be taken into account for the debt ratio up to 1% of GDP. All loans exceeding this amount will be exempt from the debt brake in the future. It remains to be seen whether Germany will spend this money only in Europe or also award contracts to American arms manufacturers.

Many sectors of the economy see the special fund not only as an opportunity for the country to catch up on its backlog, but also as a chance to profit from these new financial resources. Road and rail networks, bridges, pipelines for electricity, water and hydrogen - all of this means contracts worth billions for the private sector. Not forgetting the defense companies, whose share prices soared to new heights with the announcement of the new debt. It is important for all those who want a slice of this pie to understand how the awarding of these contracts will work. In particular, companies from other European countries that have little experience with the German federal system need strong and locally connected partners in order to gain access to lucrative contracts.