The Chancellor Friedrich Merz (CDU) passes the Bundeswehr soldier with military honor in front of the Chancellor before welcoming the Prime Minister of Denmark.
Bernd von Jutrczenka | Image Allianz | Getty pictures
Tax increases and increasing debts could be the new reality of Germany, since NATO allies will soon be faced with a higher goal for defense spending.
In 2024, the country spent around 2% of its gross domestic product (GDP) for defense and, according to NATO estimate, reached over 90 billion euros (104 billion US dollars). While these expenses agree to the existing NATO goal, according to reports, the 5% output members of the military alliance are reported.
According to the new rules, it is expected to assign 3.5% of GDP to classic defense spending and 1.5% for comprehensive matters such as infrastructure and cyber security.
The United States was fought after more defense spending. Some NATO members said they would have difficulty assigning these expenses more funds while others were supported. While Germany explained that it supported the proposal of the US President Donald Trump, there are questions about whether a 5% goal for the largest economy in Europe is really feasible.
The financial data
If you jump from 2% GDP editions to 5%, Germany would spend additional tens of billions of euros in defense every year. Chancellor Friedrich Merz said at the beginning of this year that 1% of the country GDP would make up around 45 billion euros.
These additional expenses must probably be financed by loans, Hubertus Bardt, Managing Director of Economic Institute IW Koeln, told CNBC.
“Nevertheless, such an increase will lead to remarkable distribution conflicts in the country's annual budget,” he said according to a CNBC translation. He added that, in addition to loans, the Berlin administration probably also had to have discussions about the implementation of financing cuts elsewhere – together with tax increases.
Emilie Hoeslinger, a researcher at the IFO Institute, now pointed out the latest fiscal U-turn in Germany. Berlin's new rules mean that defense expenditure above a certain threshold is freed from the so -called debt brake in Germany, which limits the debts that the government can take over and dictates the size of the structural budget deficit of the federal government. Germany also approved a 500 -billion -euro special infrastructure fund.
“The financing of defense spending by additional debts gives the government more scope at short notice,” she said according to a CNBC translation. “But the increased debt requirement will lead to higher interest costs in the medium term, which weighs the federal budget,” she said.
Bardt repeated these concerns.
“Complete financing through loans is almost impossible in the long term,” he said.
Another potential topic that experts have measured in discussions about higher defense spending are the financial rules of the European Union, which could disturb the blocks in the way of the members of the block that are more debt.
However, the rules can be temporarily suspended under exceptional circumstances, and some countries, including Germany, have applied for such a break in defense and security reasons.
Is 5% feasible?
Germany could “easily” implement a GDP defense goal of 5% at short notice, according to Jens Boysen-Hoogefe, Senior Economist at the Kiel Institute for the World Economy, would fight in the long run.
“In the medium term, [the 5% spending target could be met] With certain challenges, it would have to need a significant reform of public budgets in the long term, ”he said, according to a CNBC translation. He added that the EU probably does not offer a deep resistance on this matter and that the German government should ultimately be able to counteract any pressure by adapting its annual budgets.
Nevertheless, “it will be difficult to get such expenses going in a short time. Even the 3.5% [target is] unlikely for the coming year and [for] 2027, “Boysen-Hotrefe Said.
“Historically, it would be a very high number, which can be achieved with enough time – although this will not be easy,” said Brandt from IW Koeln and noted that a lot would also depend on whether the 1.5%that devote itself to the cheaper, safety -related costs must be new costs.
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