Germany has lifted its fourth-quarter borrowing plans to €90.5 billion, about a fifth more than initially forecast, to fund a surge in defense and infrastructure spending. The shift underscores Chancellor Friedrich Merz’s strategy of breaking with fiscal orthodoxy to modernize the Bundeswehr and repair the country’s transport and energy backbone.

Debt Sales and Market Reaction

The finance agency confirmed an additional €15 billion will be raised in Q4 2025, with €10.5 billion through capital markets and €4.5 billion via bills. That brings total issuance for the year to about €425 billion. German bonds steadied after the announcement, though 30-year yields remained at 3.25%. Traders noted softer demand for recent seven-year auctions, a result of crowded supply, but officials said long-term issuance plans remain intact.

Budget Framework and Borrowing Outlook

The Bundestag is preparing to finalize the 2025 budget, which anticipates €81.7 billion in net borrowing under normal rules and €143.1 billion when special funds are included. Core investment spending is set at €62.7 billion, while total investment jumps higher once the infrastructure and defense funds are factored in. The 2026 draft budget, already cleared by cabinet, triples borrowing compared to previous years, with defense allocations climbing above €117 billion.

Defense Spending and Debt Brake Reform

Berlin’s medium-term plan raises defense spending to 3.5% of GDP by 2029, from about 2.4% today. To achieve this, lawmakers approved a constitutional reform softening Germany’s “debt brake,” exempting major defense and infrastructure outlays from borrowing caps. A new €500 billion infrastructure fund has been set up under this framework. Officials argue Russia’s war and decaying domestic infrastructure justify the shift, though economists warn the rising debt ratio—forecast to hit 74% of GDP by 2030—poses long-term risks.

Market and Political Implications

The fiscal pivot is reshaping Germany’s bond market, ending years of Bund scarcity that once drove yields into negative territory. While markets have absorbed the added issuance, higher global interest rates mean debt service costs are climbing. Politically, Merz’s coalition with the Social Democrats frames the budget as investment in prosperity and security, while critics warn against eroding fiscal discipline. The coming months will test whether Berlin can deliver reforms while maintaining market confidence.