Germany’s big spending splurge gives EU the jitters

 

Germany’s big spending splurge gives EU the jitters

 

Chancellor-in-waiting Friedrich Merz wants to subsidize German industry. Other European governments worry about unfair competition.

 

March 21, 2025 12:15 am CET

By Hans von der Burchard, Clea Caulcutt and Tim Ross

https://www.politico.eu/article/germanys-friedrich-merz-radical-spending-election-berlin-green-energy-fund/

 

BRUSSELS ― European Union governments have expressed fears that the radical spending plans announced by Germany’s chancellor-in-waiting will end up skewing the bloc’s single market and could give the country an unfair competitive edge.

 

A month on from an election that made Friedrich Merz almost certainly the next leader in Berlin, the upper house of parliament is set on Friday to approve a historic change to the country's basic law to exclude defense investment above 1 percent of economic output from the nation’s strict spending rules, along with a €500 billion fund for infrastructure and green energy.

 

While Germany’s allies in Europe have broadly welcomed Berlin’s long-awaited loosening of the purse strings, there is a sense of unease about the impact it could have at a time when economies are still struggling to recover after the twin shocks of Covid and the Ukraine conflict, and with the looming threat of a trade war with the U.S.

 

A summit of EU leaders in Brussels on Thursday ― where Germany was represented by outgoing Chancellor Olaf Scholz because the next governing coalition has yet to be formed ― didn’t delve into the topic, with the focus firmly on how to build up the continent’s defense capabilities.

 

But the issue already shows signs of causing disquiet throughout the bloc, and within the European Commission, which polices government subsidies ― which it calls “state aid” ― with several diplomats from across Europe signaling their concerns to POLITICO.

 

Widening the gap between Europe's two largest economies

Because the extra spending ― which is expected to reach as much as €1 trillion over the next decade mainly on defense, infrastructure and green energy ― will ease pressure on Germany's regular budget, this will enable greater expenditures elsewhere. Some of this is already being earmarked for subsidies for industry, which risks giving German companies an easier ride than their competitors in other parts of the EU.

 

“We've got to watch out when it comes to productive investments in Germany,” said a former government minister in France, the EU’s second-biggest economy after Germany, speaking on condition of anonymity due to the sensitivity of the issue. "It can help us, it can pull our own economy in the right direction. What's good for the German economy is good for us. It means more markets for French companies. But it could worsen the productivity gap between the two countries. We'll need to keep up [with Germany]."

 

France has led a group of governments, which also includes Italy and Spain, the bloc's third- and fourth-largest economies, that has repeatedly called for the EU to come up with new ideas to smooth out what they call potential “distortions” of the single market, such as through pooled borrowing by all EU nations. This, however, is something Germany rejects.

 

Subsidizing 'strategic industries'

"The issue of potential distortions is something that we need to address," said a diplomat from a southern European country. The diplomat added that it remained to be seen what subsidies Germany's new government would agree on in its final coalition treaty,

 

In a preliminary agreement on their planned government coalition, Merz’s CDU/CSU bloc and the Social Democrats said they want to use the extra money available to them to finance subsidies for “energy-intensive sectors” while also introducing a “permanent cap on grid charges.”

 

The deal also calls for state aid to strengthen “strategic industries” and to attract foreign investments, such as for “the semiconductor industry, battery production, hydrogen or pharmaceuticals.”

 

Germany’s allies are therefore worried about Berlin paying billions of euros to attract new chips or battery factories, or to lower energy costs for German companies — while they are unable to afford such generous state subsidies. This echoes the strong backlash across Europe that Scholz faced in 2022 when he introduced a €200 billion scheme to bring down Germany's energy prices at the start of Russia’s war with Ukraine.

 

“First and foremost I really welcome that Germany is doing heavy increases in defense spending. Germany is an important country," Jessica Rosencrantz, Sweden’s EU affairs minister, told POLITICO.

 

But "on state aid,” she said, “we have rules, obviously."

 

The massive spending push by Merz — which marks a stark about-turn from the austere spending policies that Germany, and particularly Merz’s conservative party, have typically pursued — has already caused friction in Europe, as Berlin is also seeking to soften the strict EU spending rules it had previously demanded.

 

A German official sought to downplay the concerns on the single market, and noted that the German spending announcement has been widely welcomed, including by French President Emmanuel Macron during a visit to Berlin on Tuesday.