Why Germany’s debt rules are a bellwether for EU defence spending

Good morning. A scoop to start: Britain and the EU are engaged in ongoing talks about setting up Europe-wide shared defence funding structures, as the continent scrambles to scale up its homegrown military clout.

Today, our finance correspondent explains how Germany’s election changes those defence spending calculations, and our tech correspondent reports on a peacekeeping mission by EU lawmakers to Washington seeking to avoid a digital regulation war.

Make it rain

Fresh out of elections, Germany has joined the ranks of formerly frugal EU countries that now favour loosening spending rules to boost defence investments, writes Paola Tamma.

Context: EU countries are rushing to increase their defence spending amid fears that the transatlantic security architecture is unravelling, but have to face constraints imposed by national and EU rules that limit how much states can borrow.

On Monday, hours after his electoral victory, Germany’s chancellor-in-waiting Friedrich Merz signalled he would try to reform Germany’s constitutional debt brake before the new parliament takes office, under the current legislature running until March 24.

The move would help him avoid a blockade of the reform by the far right and far left, who together command more than a third of the seats in the new parliament. Merz needs a two-thirds majority to reform the debt rules enshrined in the constitution.

It’s unclear whether he’ll manage to ram through this existential reform in such a short time period, and some officials are sceptical he will succeed.

Even if he does, Germany will have to face other constraints, which ironically Berlin had asked for during tough negotiations on the EU’s fiscal rules.

These safeguards — keeping annual deficits below 1.5 per cent in the long term, and reducing excess debt by at least half a percentage point per year — “bite more” for the likes of Germany, Finland and Austria, one EU official said, due to their relatively low debt burdens compared with the EU’s average.

But Berlin and other EU capitals would get some respite from Brussels when it comes to defence spending.

Last week, European Commission president Ursula von der Leyen proposed to partially lift the EU’s fiscal rules to allow countries to increase defence spending without constraining their budgets. Triggering this so-called “national escape clause” would be for a limited time period and capped at a certain maximum amount, said one EU official.

The move is part of a desperate effort by the commission to drum up cash to boost Europe’s defence, after the US administration signalled it could close the security umbrella it has held over Europe for decades.

Von der Leyen’s chief of staff is “running around the commission opening every single drawer to find additional money for defence”, one senior EU diplomat said.

Chart du jour: Divided

Friedrich Merz’s mandate is far from enthusiastic: the far-right Alternative for Germany (AfD) has doubled its share of the German parliament. Here’s how a coalition could be formed.

Keep cool

Senior European lawmakers working on digital regulation are in Washington today, just as Donald Trump doubles down on his threats to retaliate against potential fines on American tech companies, writes Barbara Moens.

Context: Trump is considering tariffs on countries that levy digital services taxes on American companies, according to a memo published on Friday. It is the latest backing by the Trump administration of Silicon Valley’s efforts to challenge the EU’s tech rules, which regulate major online platforms and foresee large fines in cases of market abuse.

Over the weekend, the head of the US Congress judiciary committee Jim Jordan sent a letter to the EU’s competition chief Teresa Ribera asking how she would enforce the rules, which he said were “a European tax on American companies”.

So far, Brussels has been adamant it will not amend its tech regulation. A commission spokesperson yesterday said in response to the US tariff threat that “if needed, the EU will respond swiftly and decisively to defend its rights and regulatory autonomy against unjustified measures”.

That is the line European lawmakers will defend in their discussions with the new US administration as well, said the centre-right lawmaker Andreas Schwab, who is part of the delegation.

Schwab said Europe should “just stay cool” and explain that the EU’s regulation is not targeting any specific country or company.

The German lawmaker also warned that Silicon Valley companies needed to be balanced in their approach as “these companies are using our networks”, and Europe could “close them or ask for special levies for using our infrastructure”.

Brussels is currently investigating tech groups including Apple, Meta and Google, with several landmark cases due to wrap up next month.

What to watch today

1. EU Council president António Costa meets Poland’s Prime Minister Donald Tusk in Warsaw, and Hungarian premier Viktor Orbán in Budapest.

2. Meeting of EU general affairs ministers in Brussels.

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