A. INTRODUCTION
On 8 March 2025, almost two weeks after snap Bundestag elections, the CDU/CSU and the SPD – the two parties likely to form a coalition government in the coming legislative period (the “parties”) – have agreed on a joint exploratory paper (Sondierungspapier). The paper will form the basis for coalition talks and is expected to give insight into the government’s policy for the next four years.
It includes a EUR 500 billion special fund intended for infrastructure, education, digitalisation, energy and healthcare investment. Additional funds are to be used to enhance the defence capabilities of Germany and the EU.
In terms of the economy (which we examine in more detail below), the parties aim to increase Germany’s competitiveness by restoring confidence, acting decisively and improving planning security. Their declared goal is to return economic growth to well over 1%, and they propose several measures to promote investment and innovation for sustainable growth, new prosperity and jobs (see B below). The parties also reaffirm their general commitment to climate targets and independent research.
The exploratory paper coincides with draft constitutional amendments proposed by the CDU/CSU and SPD, which they want to pass using the outgoing parliament’s supermajority. CDU/CSU and SPD want to relax limits on government borrowing (“debt brake” or Schuldenbremse) and create a special fund for infrastructure repairs (see C for details). The rushed approach stems from concerns that the impending blocking minority of the Alternative für Deutschland (AfD) and Die Linke parties could prevent changes to the German constitution (Basic Law, Grundgesetz), which require a two-thirds majority. According to Article 39(2) Basic Law, the new parliament must convene no later than the 30th day after the elections, meaning that reform of the debt brake must be decided by 25 March 2025.
B. PROPOSED ECONOMIC MEASURES
- Low, predictable and internationally competitive energy costs/industrial electricity prices: According to the exploratory paper, the parties plan to reduce electricity tax to the minimum rate required by European law and halve transmission grid fees to achieve rapid relief of at least five cents per kilowatt hour (kWh). The aim is to permanently cap grid charges. Regulations on electricity price compensation are to be extended to other energy-intensive sectors and compensation is to be renewed. The parties propose advancing grid expansion rapidly, strategically and cost-effectively.
- Increased energy supply to stabilise and reduce electricity costs: Reserve power plants are to be used not only to avoid supply bottlenecks, but also to stabilise the price of electricity. The parties want to incentivise the construction of up to 20 GW of gas-fired plant capacity by 2030 – primarily at existing plant sites – and utilise the potential of all renewable energies. Alongside the decisive and grid-friendly expansion of solar and wind energy, that also includes the expansion of bioenergy, hydropower, geothermal energy and storage capacity.
- CO2 neutrality of energy-intensive industry: The parties plan to pass a legislative package that enables the capture and storage of carbon dioxide (CCS), particularly for emissions from the industrial sector that are difficult to avoid. The hydrogen core network must connect industrial centres nationwide.
- Lead markets for climate-neutral products: The parties intend to create lead markets for climate-neutral products, e.g. through quotas for climate-neutral steel, a green gas quota and procurement law requirements.
- Strengthening strategic industries: The parties plan to retain strategically important industries and attract new ones. Industrial clusters – for example the semiconductor clusters in eastern German federal states – are to serve as an example of this approach. The parties want to make use of the opportunities offered by the European Chips Act and the Important Projects of Common European Interest (IPCEI).
- Ensuring the automotive industry remains a key sector: The parties reiterate their commitment to retaining Germany’s automotive industry and the jobs it provides. To this end they want to rely on technology neutrality and actively work towards averting fines due to fleet emissions targets. At the same time, e-mobility is to be promoted through purchase incentives. The parties intend to support suppliers to help them manage the transformation.
- Relief for the middle class: The paper plans to relieve the wider middle class through income tax reform and increased commuter allowance.
- Incentivising and leveraging investments: The parties plan to provide tangible incentives for entrepreneurial investment in Germany. They want to embark on corporate tax reform in the coming legislative period and use a combination of public guarantees (e.g. from promotional bank KfW) and private capital in order to establish investment funds to provide equity and debt capital, e.g. for venture capital, housing construction and energy infrastructure.
- Support for the gastronomy sector: The paper plans to permanently reduce value-added tax (VAT) on food to 7%.
- Support for farmers: The parties intend to fully reinstate agricultural diesel reimbursement.
- Reducing bureaucracy: The parties plan to reduce bureaucracy, for example by abolishing reporting, documentation and statistics obligations. They also want to significantly reduce the number of company officers required by law, based on the proposal by the German Regulatory Control Council (Normenkontrollrat) to reduce bureaucratic costs for companies by 25% over the next four years.
- Prioritising innovation, research and digitalisation: A “high-tech agenda” is planned for research, innovation, technologies, transfer and entrepreneurship. The parties want to better promote fusion research with the goal of building the world’s first fusion reactor in Germany. Greater use of the opportunities offered by artificial intelligence and digitalisation is to be made, which will require a massive increase in R&D funding. Administrative procedures are to be digitalised nationwide, data registers be networked, and administrative processes automated.
- Expanding free trade: The four economic partnership agreements introduced to the Bundestag by the current government shall be reintroduced and adopted in the same wording. The parties are also committed to the entry into force of the Mercosur Agreement and the conclusion of new free trade agreements, including with the US. At the same time, they want to protect Germany’s industry from unfair trade and subsidy practices.
C. DRAFT CONSTITUTIONAL AMENDMENTS REGARDING DEBT BRAKE REFORM AND SPECIAL FUNDS
The debt brake stipulates that the budgets of the federal and state governments must always be balanced without revenue from borrowing. This regulation has its basis in Article 109 Basic Law. The debt brake principle is generally satisfied if revenue from borrowing does not exceed 0.35% in relation to the nominal GDP (Article 115(2), sentence 2 Basic Law).
The draft constitutional amendments proposed by the CDU/CSU and SPD state that due to fundamental changes in the security architecture as a result of the Russian war against Ukraine and further expected geo-economic and security policy tensions – particularly regarding the change of policy in the US – Germany and Europe will have to shoulder major financial burdens.
It is assumed that the Bundeswehr’s special fund will not be sufficient to close the capability gaps. In general, it is assumed that there is a great need for financing at federal and state level, especially in infrastructure.
To be able to meet requirements on this scale in the coming years, medium-term planning security is required.
Three key constitutional amendments will become necessary:
- Limited exemption for defence spending under the debt rule: The draft aims to provide further fiscal leeway to strengthen the alliance and defence capability of the Bundeswehr by changing Article 109(3) and Article 115(2) Basic Law. The federal government is to be authorised to make additional budget appropriations. “Necessary defence spending” above 1% of GDP will then be exempt from the debt brake.
- Limited additional debt leeway for the federal states: The federal states as a whole are to have a limited structural debt leeway of 0.35% of GDP, regardless of their economic situation. The federal states themselves will decide on the specific use within the framework of their budgetary autonomy.
- Special infrastructure fund: A new Article 143, letter (h) Basic Law is intended to authorise the federal government to set up a special fund with its own credit authorisation of up to EUR 500 billion over the term of the fund for investments in national infrastructure. The special fund is to have a term of 10 years. Up to EUR 100 billion of this amount will be earmarked for investments by the federal states and municipalities. This credit authorisation is also to be exempt from the debt brake. The increase in spending on public investment is expected to stimulate additional private sector activity.
Update on the limited exemptions under the debt rule and the establishment of special funds: The CDU/CSU and the SPD have submitted revised draft constitutional amendments under which not only defence spending, but also federal spending on civil defence and intelligence services is to be exempt from the debt rule above 1% of GDP. In addition, the federal government will now also be able to set up special funds for investment in climate protection – an option that was only available for investment in infrastructure. The approval period for investments from these special funds is to be increased from 10 to 12 years, and transfers of up to EUR 50 billion from this special fund to the climate and transformation fund are to be permitted.
According to a draft constitutional amendment from the BÜNDNIS 90/DIE GRÜNEN, expenditure on aid for countries attacked in violation of international law, foreign aid and peacekeeping as well as information technology systems, collective security systems and infrastructure is also to be exempt from the debt rule, but only if it exceeds 1.5% of GDP. However, the draft does not contain any special regulations on the establishment of special funds.
D. CONCLUSION AND NEXT STEPS
The CDU/CSU and SPD are planning to make considerable changes, especially to the debt brake. However, it is still not clear whether the parties will be able to implement the plans because they require a two-thirds majority to pass in the Bundestag, rendering the support of the Green party necessary – support that is currently uncertain. It will be especially important to follow the political discussion closely in the coming weeks, in particular. Companies should also carefully monitor and assess the extensive investment plans outlined in the parties’ exploratory paper, along with the potential legal changes, incentives and investment opportunities.
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