Germany’s incoming government has embraced military Keynesianism

[BERLIN] For the first time in several decades, Germany is rearming. In the ongoing talks to form a coalition government, the Christian Democrats (CDU) and the Social Democrats (SPD) – the first and third-largest parties in the Bundestag after February’s federal election – have agreed to exclude military spending above 1 per cent of gross domestic product from the constitutionally enshrined “debt brake” limiting fiscal deficits. The change, passed by the Bundestag with the votes of the Green Party, marks a watershed moment in German fiscal policy and will create path dependencies for years to come.

From an economic perspective, the CDU, SPD, and Greens are making a permanent commitment to military Keynesianism. Whatever form the next German government takes, it can use debt-financed fiscal packages to increase spending on drones, guns, and tanks without limit. This is an unprecedented development for a country whose political culture has long treated budget deficits as anathema. In 2009, the Bundestag introduced the debt brake to limit the structural deficit to just 0.35 per cent of GDP from 2016.

The shock of US President Donald Trump’s second administration – which has cast serious doubts on America’s commitments to collective defence within the North Atlantic Treaty Organization – has been severe enough to weaken the strict fiscal rectitude manifested in the debt brake. The problem is that the new outlook extends mainly to military spending, and only in a very modest way to infrastructure and climate investments. When it comes to the rest of the economy and society, austerity, it appears, will still apply.