(Source: Observer.com, 2025-03-15)

The CDU leader and w88 casino Chancellor-elect Mertz, who just won the parliamentary election, decided to reverse his long-term fiscal prudence stance and proposed a 500 billion euro infrastructure investment fund, as well as amending the "debt brake" rules of the w88 casino Constitution to exclude defense expenditures exceeding 1% of GDP, essentially allowing unlimited borrowing for national defense.

However, this move was openly opposed by Franziska Brandtner, co-leader of the w88 casino Green Party, and also caused Germany’s ambitious fiscal expansion plan to encounter challenges from the beginning.

In the context of the United States gradually reducing its investment in Ukraine, the Observer Network is online regarding the impact of Germany’s fiscal expansion policy on the situation in Russia and Ukraine and the entire European UnionShi Shiwei, professor at the w88 casino and director of the Sino-German Economic and w88 Research Center, interpret the prospects of this debt game and the future of China-EU economic and w88 relations.

[Dialogue/Observer Network Tang Xiaofu]

Observer Network: There has been a view that Germany’s debt has been a heavy burden for many years, leading to a serious lack of investment in w88 casino defense and infrastructure, dragging down the domestic economy and also dragging down the entire European economy. However, there are also many objections to the reform measures introduced by Mertz this time. What do you think of this?

Shi Shiwei: These three things all require amendments to the constitution and require approval by a two-thirds majority of parliament. The three projects in this agreement have great influence. The first is a special fund of 500 billion euros, which is mainly used for public infrastructure investment, including government expenditures in areas such as road and bridge construction and education innovation.

However, the establishment of the special fund has attracted a lot of criticism. Some economists and opponents believe that based on historical experience, similar special funds are often difficult to fully use for the intended goals due to the leadership's tendency to borrow money and political factors.

For example, when Merkel was in power, the Social Democratic Party supported budget control, but now its attitude has made a 180-degree turn, making everyone worried that the funds will not be used for infrastructure construction, but will instead be used to increase social welfare benefits, pensions, or make up for other expenses such as reducing VAT revenue from the catering industry.

In addition, some political parties, such as the Liberal Democratic Party, believe that public infrastructure investment itself is indisputable, especially in the current context of increasingly prominent problems such as aging public infrastructure and lagging digitalization in Germany. They advocated that related issues can be solved within the existing budget system without the need to set up special funds.

This controversy actually reflects the long-term differences between Keynesian deficit budget logic and neoliberal economics in the economics community. Economists who support Keynesianism, especially those close to w88 unions, generally welcome public investment to promote economic development. Some neoliberal economists emphasize that funds in special funds need to be repaid in the future, which is essentially a waste of money and consumption of future financial resources in advance, which may undermine fiscal sustainability, increase the government's debt repayment pressure, and limit the government's space for necessary investments in the future.

In general, although the implementation of this policy is controversial, considering that Germany's current public debt level is generally low and it is in a relatively favorable position among similarly developed countries, the government still has a certain amount of room for fiscal maneuvers.

As for the debt brake restriction reform, it will also give the government hundreds of billions of euros of spending space. Although the specific amount is not yet clear, due to issues such as defense spending and EU strategic autonomy at the federal level, opposition in the short term is relatively low. As states and localities continue to struggle with budget allocations due to refugee issues and are in urgent need of additional funds, opposition has been muted and has not been the focus of attention.

Observer Network: More importantly, the CDU/CSU and Social Democrats need the support of the Greens or the Free Democratic Party (FDP) to reach a two-thirds majority. Can the relevant motion be passed? In addition, what is the attitude of the Alternative for Germany (AfD), the second largest party in parliament, towards the bill?

Shi Shiwei: The bill was submitted to the Bundestag for discussion on March 13 and voted on March 18. At this stage, the CDU/CSU and‌The main goal of the Social Democrats is to win over the support of the Greens, as the Free Democrats have made clear their opposition. In addition, the bill must obtain the approval of a two-thirds majority of the Bundesrat representing each state.

The Liberal Democratic Party has long emphasized a free economy, advocating deregulation and promoting private investment in exchange for prosperity. The party has always opposed reform measures and debt brake policies. It broke down with the three-party ruling coalition composed of the Social Democratic Party and the Green Party because of the 2025 budget issue, and the ruling coalition was disbanded. Therefore, the possibility of its final support in this round of motion is almost zero. CDU/CSU and‌The Social Democrats must turn to the Greens.

According to the latest news from the w88 casino media, although the factions remained deadlocked during the first debate in the Bundestag on the 13th local time, the Alliance Party, the Social Democratic Party and the Green Party still reached a compromise on the morning of the 14th: First, the Green Party agreed to amend the "debt brake" rules of the w88 casino Constitution to exclude defense expenditures exceeding 1% of GDP. However, defense expenditures must also include the protection of citizens, information technology security, and support for countries under attack. Secondly, state governments will gain greater borrowing space: state governments will be allowed to borrow no more than 0.35% of their output value, while the current debt brake does not allow state governments to have budget deficits, that is, borrowing, which means that the total debt of states will reach 16 billion euros.

In addition, 100 billion euros will be allocated to the states in the proposed infrastructure investment fund. Finally, the 500 billion infrastructure investment fund must be used as "additional investment funds", that is, it can only be used when the funds exceed 10% of the federal investment budget (currently 50 billion euros), and the investment time limit is 12 years. This prevents the funds from being used for ongoing projects or government consumption expenditures.

In addition, 100 billion euros in the infrastructure fund will be allocated to the climate and transformation fund to achieve the Green Party’s insistence on achieving more investment in reaching carbon neutrality by 2045. At present, it seems that if nothing unexpected happens, the Bundestag will vote with a two-thirds majority to pass the investment expansion proposal of the Alliance Party and the Socialist Party next Tuesday, and the approval of the Bundesrat is just a matter of formality.

The Alternative for Germany, the second largest party, chose to sue the Alliance Party and the Social Democratic Party in the w88 casino Constitutional Court to block the unconstitutional proposal to amend the constitution on the grounds that such major matters should be decided by the newly elected Bundestag, rather than by the already elected Bundestag. The AfD's proposal was supported by the left-wing party, which also received more votes in the February general election.

However, based on historical experience, the Federal Constitutional Court usually supports the policy of the majority party in such cases. Judging from the overall political environment, political factors still dominate the ruling on such politically-involved motions, so the Federal Constitutional Court is not expected to reject the Bundestag's vote on this proposal.

Observer Network: Are Germany’s recent changes in its defense spending budget related to the U.S. trend of reducing aid to Ukraine and military investment in Europe?

Shi Shiwei: I recently read a NATO report, which predicts that Germany’s annual defense spending will reach 2% of GDP in 2025, specifically 2.12%. Of course, such data will be calculated using some small numerical techniques. For example, they include the 100 billion euros special fund proposed by the Scholz government at the beginning of the Russo-Ukrainian war, which means an annual increase of 20 billion euros in the budget. Based on the calculation of Germany's GDP of about 4.3 trillion euros in 2024, 2% is about 86 billion euros. Therefore, adding 20 billion euros is a significant increase. In addition, pensions for military veterans related to the former Democratic Republic of Germany are also included in the calculation, making the value meet the requirements promised by the w88 casino government.

So economists predict that due to increases in military spending, etc., a cumulative deficit of about 130 billion euros may occur in the next four years, which is roughly equivalent to 1% of the annual gross domestic product (about 43 billion euros). Therefore, this adjustment specifically stipulates that the portion of defense expenditure exceeding 1% of GDP will not be included in the deficit calculation.

According to relevant estimates, in the long term, Germany’s cumulative military expenditure deficit is expected to reach about 400 billion euros in ten years. Add this to the special expenditure of about 500 billion euros proposed this time, and the total can reach 1 trillion euros.

This series of changes is not a sudden move, but the result of a long period of preparation. Europe not only strives to achieve strategic independence politically and economically, but also tries to play an independent role in the field of defense. Such a change does not mean Europe rejects NATO, but requires Europe to demonstrate its independent influence within the NATO framework.

The United States has made it clear that it will stop military assistance to Ukraine, leaving a funding gap that needs to be filled by the EU. In terms of military aid to Ukraine, Germany is second only to the United States. In the past three years, the amount of aid has been approximately 28 billion euros, while the United States has provided as much as 100 billion euros, and the United Kingdom has only provided 11.6 billion euros. Germany faces greater pressure in assuming European security and strategic autonomy.

Judging from the current situation, once Ukraine ceases fire, the United States will not be responsible for its security guarantee, which means that its peace guarantee task will be undertaken by Europe, which also requires Europe to significantly increase defense spending to support peacekeeping and other tasks.

Observer Network: In recent years, Germany has been trying to increase its financial investment in the military industry. Could you please introduce the recent development of the w88 casino military industry? How much of a boost did the 100 billion euro military fund proposed at the beginning of the war boost its defense industry?

Shi Shiwei:According to data released by Germany, all 100 billion euros of military funds have been put into use, which has greatly promoted the entire w88 casino arms industry. For example, Germany's Rheinmetall will implement Current sales increased by 39.5% year-on-year to approximately 2.45 billion euros, and its order backlog reached approximately 51.9 billion euros as of September 30, 2024, a year-on-year increase of 41%. The company expects full-year sales in 2024 to exceed 10 billion euros. Related investments have also led to the prosperity of the entire w88 casino military industry stocks.

But now the problem is its production capacity. It was not until 2023, more than a year after the Russian attack, that Germany began to significantly increase defense spending, reaching the goal of NATO member states' military spending accounting for more than 2% of GDP. The number of w88 casino air defense systems and self-propelled howitzers is currently declining significantly.

According to a study released by the Kiel Institute for the World Economy (IfW) last September, if the current procurement pace is followed, it will take about 15 years for w88 casino fighter jets to reach the 2004 inventory, tanks about 40 years, and self-propelled howitzers nearly 100 years. So now Germany needs a lot of time to rebuild its armaments.

Currently, Europe is in a state of security crisis. If the United States truly withdraws, it will become extremely difficult for Europe to defend Ukraine. In addition, France's nuclear arsenal is too small, with sea-based nuclear forces as its core, and it is impossible to truly provide Ukraine with a nuclear umbrella. From the perspective of conventional armaments, Europe currently has neither a unified army nor a unified command system. The power of European countries now mainly belongs to the NATO system, which is dominated by the United States. Therefore, it will take a long time to achieve the goal of European independent defense.

To this end, Europe is taking two paths: on the one hand, by expanding military expenditure; on the other hand, it is negotiating with the United States to avoid a too rapid withdrawal of the United States in the short term. Zelensky in Ukraine is also communicating with the United States. After all, he also knows that Europe cannot replace the United States. But the United States should not provide Ukraine with more options. After all, the United States is focusing its strategic focus on the Asia-Pacific and China.

Observer Network: This time we saw a wave of selling on w88 casino bonds in the market. Although this situation has stopped, do you think that in the future, as the debt base expands and the United States reduces its investment in European security, will w88 casino bonds face a new round of selling pressure? Will this pose a challenge to the sovereign creditworthiness of Europe as a whole?

Shi Shiwei:Judging from the situation in Germany, w88 casino bonds are unlikely to face a new round of selling pressure. Germany is still rated AAA by Standard & Poor's, and its sovereign debt accounts for only 62% of GDP, which is at a low level. In comparison, the debt ratio of the United States is about 120%, France is 110%, and Japan even reaches about 240%.

Although the interest rate on w88 casino ten-year bonds has increased from 2.5% to 2.75%, it is expected that yields may rise further in the future, thereby increasing debt repayment pressure and depressing bond prices. However, by the standards of developed countries, Germany's debt level is relatively low and its credit status is superior.

Based on its good reputation, a large-scale sell-off of national debt is unlikely to occur, but Europe as a whole currently has a problem: the European Union plans to significantly increase defense spending, totaling approximately 800 billion euros. Among them, 650 billion euros will be raised through debt, while the remaining 150 billion euros will be raised by the EU. This means other member states will also have to borrow. If countries like Southern Europe, which already have low debt credit, are forced to increase borrowing, they will face severe financial challenges.

This will eventually put the EU's common debt arrangement on the agenda. During the European debt crisis and the COVID-19 epidemic, the EU passed a COVID-19 relief fund, and all member states jointly provided guarantees for the fund. Whether a similar approach can be used in the current critical situation is still controversial. However, the Schulz government in Germany and the Nordic countries are firmly opposed to this, and there are doubts whether Mertz will agree.

After all, Germany is currently the only major country in the EU that can finance at a lower cost. If Germany’s financing environment deteriorates, the entire euro zone will face severe challenges. Therefore, the EU always has fundamental contradictions on the issue of common debt.

In addition, regarding the implementation of the 800 billion euro budget, the final result may be discounted or the implementation time may be extended. The EU will also mainly play a coordinating role on this issue, and each member state is more inclined to strengthen its own defense and expand its own military expenditures. If southern European countries rely on borrowing to expand their military, it will undoubtedly be very difficult.

There are different levels of attention on this matter within Europe. The security focus of Spain, Italy and other countries is mainly concentrated in the Mediterranean region. Germany is at the forefront of European security and focuses on the Eastern European frontline. However, the arms expansion of some Eastern European countries has been very significant, and further expansion may be beyond their capabilities. This may have a certain impact on Europe's future sovereign credit.

Observer Network: Will Europe face the risk of further recession in the future? What should be the next step for China-EU economic and w88 relations? How should we attract companies from Germany and other countries to invest in China?

Shi Shiwei:Generally speaking, the current economic prospects of Europe are more optimistic than those of the United States. In recent years, the EU's major economies, especially Germany, have been revitalizing their economies by expanding military spending and increasing investment in infrastructure and other areas. The w88 casino government has made it clear that it will increase Germany's potential growth rate to 1%. Although this target is more cautious than the previously proposed 2% target. Under the current circumstances, it is not easy for Germany to achieve 1% growth.

Although Europe has experienced a period of economic recession, it does not mean that there will be a greater risk of recession in the future. In the short term, Europe's economic situation is even expected to be better than that of the United States, because Europe does not have the problem of insufficient demand, wages are growing rapidly and inflation has dropped significantly.

The main challenge currently facing Germany is insufficient investment, especially in infrastructure construction, bureaucracy and labor shortage. Therefore, achieving even 1% economic growth through increased investment and lower energy prices would be a major victory. The economic growth rate of some EU member states may exceed that of Germany, reaching 1.5% to 2%, which will have a positive impact on the economic and w88 relations between China and Germany and China and Europe. As we all know, the EU is China's second largest trading partner. In the context of the US imposing additional tariffs, China-EU economic and w88 relations have become even more important.

In terms of corporate investment, w88 casino companies’ investment in China has hit new highs in recent years, and China has become Germany’s fourth largest investment destination. w88 casino companies’ investment in China accounts for 50% of the EU’s overall investment and approximately 10.4% of Germany’s overseas investment. There is still room for further cooperation and expansion in the field of investment by w88 casino small and medium-sized enterprises in China in the future. At the same time, how to attract Chinese companies to invest in Germany will also become an important issue that both sides need to urgently promote in the future.

In addition, China and Germany are increasingly interpenetrating each other in the supply chains of Germany's pillar industries such as automobiles and chemicals, and their connection with the Chinese market is very close. It is not easy for all parties to withdraw from this mutually beneficial cooperation situation.

With original link:https://m.guancha.cn/shishiwei/2025_03_15_768536_2.shtml