Germany to raise defence spending to 3.5% of GDP by 2029, sources say

By Maria Martinez

BERLIN, June 23 (Reuters) - Germany will raise defence spending to 3.5% of economic output by 2029 funded through a nearly 400 billion euro borrowing programme, sources said on Monday, as Chancellor Friedrich Merz aims to send a strong signal ahead of this week's NATO summit.

After low spending following the end of the Cold War, Germany complied with the NATO alliance's target of 2% of GDP for the first time in three decades in 2024 with a special fund created by Merz's predecessor after Russia's invasion of Ukraine.

Germany's total defence spending would go up from 95 billion euros ($108.89 billion) in the draft budget for 2025 to 162 billion euros in the budget framework for 2029, the sources said.

The draft budget for 2025 and the budget framework for 2026 will be approved by the cabinet on Tuesday with record investments of 115.7 billion euros in 2025 and 123.6 billion euros in 2026, up from 74.5 billion euros in 2024.

REVIVING GROWTH

The spending bonanza is part of the new government's plans to stimulate the economy after Germany failed to grow for two consecutive years and with the government forecasting further stagnation this year.

This investment surge will be possible thanks to a special 500 billion euro infrastructure fund and an exemption from debt rules for defence spending which were approved in March.

The special fund for infrastructure, which is excluded from Germany's borrowing rules, or "debt brake", that limit borrowing to 0.35% of GDP, will add borrowing of 37.2 billion euros in 2025 and 57.9 billion euros in 2026.

Borrowing will go up in the budget from 33.3 billion euros in 2024 to 126.1 billion euros in 2029, the sources said.

Germany would be able to borrow a total 378.1 billion euros for defence between 2025 and 2029 thanks to debt brake reform from March, they said.

After former chancellor Olaf Scholz's coalition collapsed in November, the last government ran out of time to pass the 2025 budget. Germany has been operating on a provisional budget since the start of the year.

After the draft budget for 2025 is approved by the cabinet on Tuesday, the budget committee will finalise the details in September, when it should also be approved by lawmakers.

Investing, reforming the economy and consolidating the budget were the three priorities in budget preparations, Finance Minister Lars Klingbeil said on Monday.

"Those were tough negotiations," Klingbeil said, explaining that ministries' requests exceeded by 47 billion euros the current budget for 2025 of 503 billion euros.

($1 = 0.8718 euros)