FRANKFURT: Germany’s government pledged Tuesday to make massive new investments by taking on record debt as it presented its budget plans with the aim of reviving the economy and building up the military. The plans approved by Chancellor Friedrich Merz’s cabinet included the 2025 draft budget - delayed after the previous government collapsed last year - as well as the outline for public finances until 2029. The ambitious program for coming years, to be voted on by parliament in September, marks a break from years of financial austerity pursued by previous German governments and highlights the sweeping fiscal shift set in motion by Merz.

The conservative leader, who took power in May, is betting on taking on vast debts to pull the euro-zone’s biggest economy out of a long downturn, upgrade creaking infrastructure and improve public services. “Our primary goal is to boost the economy, to secure jobs in our country and to create new ones,” said Finance Minister Lars Klingbeil, presenting the budget plans. “Our country has been ruined by austerity in many areas - and the investment backlog is huge.”

The budget forecasts agreed on by Merz’s CDU/CSU bloc and their coalition partners, the centre-left SPD, outline record spending on the military, roads, railways and hospitals - as well as unprecedented new borrowing. The figures are eye-watering: the finance ministry plans to take on some 847 billion euros ($984 billion) in debt over the entire legislative period, divided between the regular budget and “special funds” set up for purposes such as boosting the military and infrastructure.

Spending on the armed forces alone is expected to reach 162 billion euros in 2029, more than triple Germany’s defense budget before the war in Ukraine. Germany is set to reach the new NATO target of spending 3.5 percent of gross domestic product on core military needs in 2029, six years earlier than previously planned. Under the target, set to be announced at this week’s NATO summit, allies will also agree to spend 1.5 percent of GDP on broader security-related items like cybersecurity - a compromise deal meant to placate US President Donald Trump. Merz has vowed to build up Europe’s “strongest conventional army” in response to the Russian threat amid the Ukraine war as well as concerns about US security commitments to Europe under Trump.

Morale hits highest level

German business morale hit its highest level for a year in June, a survey showed Tuesday, as hopes grow the new government will provide a much-needed boost for Europe’s top economy. The Ifo institute’s confidence barometer rose to 88.4 points, up from 87.5 a month earlier, its sixth straight increase and slightly better than analysts had expected. “Sentiment among companies in Germany has improved,” Ifo president Clemens Fuest said. “The German economy is slowly building confidence.” Morale rose among businesses in all sectors surveyed by Ifo - manufacturing, services, trade and construction. It was brighter particularly in the services and construction sectors, according to the survey, for which around 9,000 businesses were quizzed.

The euro-zone’s traditional growth engine has in recent years faced a perfect storm of problems, from a manufacturing slump to high energy prices, and shrank in both 2024 and 2023. Hopes for a recovery this year were also dented by US President Donald Trump’s tariff blitz, which could hit export power Germany hard. However, new Chancellor Friedrich Merz’s plans to ramp up infrastructure and defense spending have spurred optimism of a turnaround, while hopes for an EU-US deal on tariffs have somewhat eased fears about their potential impact.

“German businesses seem to be focusing on the bright side of what could happen under the new German government, rather than fearing the downsides from ongoing uncertainty and trade tensions,” said ING bank analyst Carsten Brzeski. But he cautioned that there were still many “downside risks” for the German economy, from the potential for renewed trade tensions with the United States to a higher oil prices that could hit energy-hungry manufacturers. The German government in April downgraded its growth forecast for this year to zero, citing Trump’s volatile trade policy. But some economic institutes have more recently predicted the economy will return to growth in 2025. — AFP