Germany’s Dual Bomb on the Stability Pact: Mertz Package Impact

Germany has delivered a double blow to the European Stability Pact, affecting both the current pact (effective since January 1, 2025) and the one that will be shaped after the activation of national escape clauses for increasing spending up to 1.5% based on the Commission’s recommendation through the White Paper published on March 19, 2025. This is acknowledged by an extensive study from the German Institute for Economics (IW), whose president led the formation of the Mertz package, unveiled on March 22, 2025. The Mertz package, passed by votes from CDU, SPD, and Greens, introduces three key adjustments to the German Constitution: an exception to the debt brake for defense and security spending over 1% of GDP, a special investment fund lasting twelve years without relaxing the debt brake, and a relaxation of the debt brake for federal states up to 0.35% of GDP. According to IW, if the new funding options are fully utilized, nominal debt levels could increase by about 2.2 trillion euros over the next twelve years, raising the debt-to-GDP ratio to an estimated 85% by 2037. Annual government deficits could range between 3.3% to 3.4%, with worst-case scenarios suggesting up to 5%. Additionally, interest expenses will significantly rise, burdening public budgets, potentially doubling the federal government’s tax-interest ratio from 2025 to 17% by 2037. These measures have implications for the Stability and Growth Pact, which caps debt at 60% and annual deficits at 3%. The additional public debt for defense could push deficits up to 5%. However, the European Commission is considering exempting defense expenditures up to 1.5% of GDP from fiscal rules, which could keep German deficits under the 3% threshold annually.