FRANKFURT, Germany: Germany is set to loosen its strict debt limits in a historic shift that could unlock over 1 trillion euros ($1.08 trillion) for defense and infrastructure spending.

The move marks a significant break from Germany's traditionally debt-averse policies and could reshape the country's economic and security landscape.

The debt brake, introduced in 2009, limited new borrowing to 0.35 percent of GDP. While initially effective, it struggled to withstand economic shocks like the pandemic and Russia's invasion of Ukraine. Repeated emergency exemptions allowed the government to sidestep the rule, but a court ruling in late 2023 forced a budget rewrite and reignited debate over Germany's borrowing limits.

The new agreement, reached between the conservative Union bloc and the center-left Social Democrats, would exempt military spending over one percent of GDP from the debt limit. It also includes a 500 billion euro fund for infrastructure, covering civil and disaster protection, transport, hospitals, energy, education, and digitization. If passed, economists estimate it could allow over 1 trillion euros in new spending over a decade.

"The extra room for defense spending sends a clear signal to Vladimir Putin and Donald Trump as well as to Germany's European friends that Germany is serious about defending itself and helping Ukraine," said Holger Schmieding, chief economist at Berenberg Bank. "Germany is finally taking on the leadership role, which, given its size and fiscal space, it should have assumed years ago."

The shift comes amid growing concerns over European security. Trump's recent foreign policy stance, including his suspension of military aid to Ukraine, has forced European leaders to reconsider their reliance on the U.S. for defense. Germany, which only met NATO's two percent GDP defense spending requirement through a special 100 billion-euro fund in 2022, must now secure long-term funding. That fund is set to run out in 2027.

Friedrich Merz, leader of the Union bloc and likely the next German chancellor after his party won national elections on February 23, had previously opposed changes to the debt brake. However, he shifted his stance, acknowledging that "if the facts change, I change my mind."

Economists say the relaxed debt brake could help Germany emerge from years of economic stagnation. Decades of underinvestment in infrastructure have left Germany with unreliable train services, crumbling bridges, and slow digital adoption. Following the announcement, Morgan Stanley revised its growth forecast, predicting an additional 0.2 percent GDP growth this year and 0.7 percent next year.

"This is game-changing if it goes through," said Jim Reid, research strategist at Deutsche Bank. Schmieding added, "The infrastructure fund signals that the new government will seriously tackle key domestic deficiencies."