German Chancellor Friedrich Merz is facing growing criticism from economists and the Bundesbank over his government’s use of newly approved borrowing powers. Critics allege that funds intended to strengthen defence and infrastructure are instead being redirected toward welfare programs, tax cuts, and routine expenditures.
Concerns Over Misuse of Borrowed Funds
Following his election victory in February, Merz negotiated a deal with the Social Democrats and the Greens to ease Germany’s strict constitutional debt limits. The agreement authorized up to €1 trillion in new borrowing over the next decade, with the aim of revitalizing infrastructure and bolstering defence spending.
However, new analyses from leading institutions—including the German Economic Institute (IW), the Bundesbank, and the Ifo Institute—warn that a significant portion of these funds may be used for non-investment purposes.
The IW estimates that by 2029, at least 40% of the planned additional €271 billion in borrowing will go toward regular budget items such as tax cuts for the hospitality sector and higher pensions for non-working mothers—not for new projects in defence or infrastructure.
“This budgetary shell game risks undermining Germany’s future competitiveness,” said IW economist Tobias Hentze, accusing the government of employing “a whole range of subterfuge” to bypass spending rules.
Warnings from the Bundesbank and Ifo
The Bundesbank has also expressed alarm, stating that much of the new borrowing is being used to “create other fiscal leeway,” without delivering tangible improvements in infrastructure or defence capabilities.
It predicts Germany’s budget deficit will rise from around 2% of GDP in 2025 to 3.5% next year, and could reach 4% in subsequent years.
Meanwhile, Munich’s Ifo Institute found that Berlin is shifting key investment projects from the main budget into special funds, effectively reducing direct investment. “A lot of the money is flowing into measures that neither strengthen our infrastructure nor improve our competitiveness,” warned Danyal Bayaz, the Green finance minister of Baden-Württemberg.
Government Defends Budget Strategy
The Finance Ministry insists that the spending complies with the constitutional amendment, which mandates that at least 10% of the core budget be allocated to investment. Officials argue that any additional amount qualifies for financing through the new €500 billion infrastructure fund.
“Shifts between the core budget and special funds were made where they were technically justified and sensible,” a ministry spokesperson said.
Armin Steinbach, the ministry’s chief economist, rejected the criticisms, claiming that many of the think tanks used “inflated investment projections” and unrealistic assumptions—particularly that €100 billion of the infrastructure fund allocated to federal states would not be used for investment.
Short-Term Impact vs. Long-Term Risks
Sebastian Dullien of the IMK Institute acknowledged that while the government may be stretching definitions, the near-term impact on economic growth will likely remain positive. “In macroeconomic terms, it is largely irrelevant in the short run whether the money is used for investment or other spending,” he said.
However, experts caution that in the long run, diverting investment funds toward social spending could erode Germany’s competitiveness, delay infrastructure renewal, and complicate fiscal sustainability.
In Summary:
Germany’s ambitious post-election borrowing plan—intended to modernize infrastructure and defence—is under fire for allegedly being repurposed to finance welfare and tax relief. While short-term growth may benefit, economists warn the approach risks undermining the structural investments needed to secure the country’s long-term economic strength.
