Much of the post-election commentary in Germany has focused on a dramatic shift in fiscal policy. This overshadowed the result of the election itself: the country’s political turn to the right with a doubling of votes for the Alternative für Deutschland (AfD) has received surprisingly little scrutiny.
ZOE Institute for Future-fit Economies unpacks these two developments, how they are intertwined, and what they could mean for Germany’s economy and democracy:
For over fifteen years, Germany’s constitutional debt brake (Schuldenbremse) capped structural deficits at 0.35% of GDP – even stricter than EU fiscal rules. This paralysed long-term investment and contributed to the collapse of the previous ‘traffic light’ coalition government, which struggled to fund climate policy, infrastructure renewal, and international commitments.
Now, Germany has broken with its fiscal orthodoxy, and in a highly unusual way. Just days before the newly elected Bundestag took office, the Christian Democrats (CDU) and Social Democrats (SPD) – while only beginning coalition talks – pushed a sweeping reform of Germany’s debt rules through the outgoing parliament, with support from the Greens. As CDU leader Friedrich Merz put it: this is a “whatever it takes” moment.
The reform opens the door to public borrowing that could reach into the trillions over the next decade. It marks a fundamental shift in how Germany will spend, invest, and grow – with major implications for climate policy, industrial strategy, and the country’s democratic stability.
The reform opens the door to public borrowing that could reach into the trillions over the next decade. It marks a fundamental shift in how Germany will spend, invest, and grow – with major implications for climate policy, industrial strategy, and the country’s democratic stability.
The debt brake remains, but with two major exceptions:
First, all military spending exceeding 1% of GDP can be financed through borrowing, bypassing the debt brake. This means Germany can take on unlimited amounts of debt for defence.
Second, there’s a €500 billion special fund for infrastructure and climate investment over 12 years. This includes €100 billion for the Climate and Transformation Fund, Germany’s main vehicle for green industrial policy and home insulation. It also possibly entails €100 billion for the 16 states. All of this must be in addition to the core federal budget, potentially constraining other priorities like CDU-promised tax cuts.
Additional reforms include relaxing state-level debt limits, embedding climate neutrality by 2045 into the constitution, and establishing a commission to propose longer-term fiscal rule changes – though expectations for a fundamental reform are low.
Can the reform undermine the AfD?
Germany is clearly entering a new era of fiscal expansion, with defence and infrastructure fuelling a projected return to 2% GDP growth by 2026. After years of stagnation, the economic logic is simple: reindustrialisation, jobs, momentum.
Ironically, the defence-led boom may succeed where past strategies have failed: in reducing the appeal of the far-right Alternative für Deutschland (AfD). The AfD secured 20% of the national vote in February, becoming the second-largest party in the Bundestag. It thrives on economic uncertainty and anxiety, cultural resentment, and the perception that green policy means decline. If defence-driven growth creates jobs and renews confidence, the economic pessimism that fuels the far right may lose traction.
…the first beneficiaries of this boom are not wind turbines or heat pumps, they are tanks, ammunition, and military supply chains. This kind of boom risks delaying – or deflecting – the harder long-term work of building a resilient economy that delivers a good life for all within planetary boundaries.
However, the shift to defence investment also carries considerable risk that the ecological transition will be sidelined. Without a clear balance – ensuring substantial resources flow into green modernisation and a just transition – Germany could miss its moment to prepare for the green markets of the future. Because the first beneficiaries of this boom are not wind turbines or heat pumps, they are tanks, ammunition, and military supply chains. This kind of boom risks delaying – or deflecting – the harder long-term work of building a resilient economy that delivers a good life for all within planetary boundaries. If Germany isn’t prepared for the realities of the green transition when this boom fades, it could be left behind – a situation which would again fuel the economic fears exploited by the far-right.
Will there be enough money for climate action?
The money that is available must even more so be spent wisely. In ways that deliver tangible, widely shared benefits — like bringing future-fit industries to left behind regions, challenging the narrative that green transformation means sacrifice and insecurity.
To weaken the AfD narrative long-term, green policy must become visible, local, and have direct benefits for people. Yet, even with €100 billion for the Climate and Transformation Fund, investment levels in green polices fall short in the current reforms. Reaching the national climate goals will require €20–30 billion additionally per year, yet the reform allocates only €8 billion annually.
The money that is available must even more so be spent wisely. In ways that deliver tangible, widely shared benefits — like bringing future-fit industries to left behind regions, challenging the narrative that green transformation means sacrifice and insecurity.
Is this a fair deal for the future?
This fiscal shift also revives the debate on intergenerational fairness. For years, the CDU insisted that strict debt limits were necessary to protect future generations from inherited debt. Now, large-scale borrowing is on the agenda – but mainly to fund defence and patch up crumbling infrastructure.
Yes, future generations will benefit from roads and military security. But they’ll also inherit the bill for today’s failure to invest earlier in resilience, education, and ecological transition. A fair share of the burden between current generations – who have benefited from allocating less money to these areas – and future generations would only be right.
Germany’s fiscal reform is a historic opportunity. The money is finally there. Now comes the hard part: spending it wisely, and in ways that put the economy on a sustainable footing long-term. What the country does with this new fiscal space will shape far more than GDP figures.
A crucial test for green economic policy
Germany’s fiscal reform is a historic opportunity. The money is finally there. Now comes the hard part: spending it wisely, and in ways that put the economy on a sustainable footing long-term. What the country does with this new fiscal space will shape far more than GDP figures.
It will determine whether the AfD continues to grow. It will define whether green policy is seen as a threat or a path to prosperity. And it will test whether Germany’s economic model can evolve into one that truly delivers resilience and works for people, the planet, and generations to come.
Henri Schneider
Henri Schneider works as an Economist and Project Manager at ZOE Institute for Future-fit Economies. He particularly focuses on the question of how the different actors in the new economy space can best be brought together to work on the socio-ecological transformation.
Zoe Elsner
Zoe Elsner, is Strategy and Policy Advisor ZOE Institute for Future-fit Economies, focuses on strategic questions around redefining progress, industrial policy, and future generations. She also drives organisational strategy and development.