Germany's ambitious fiscal reforms: what Germany's €500 billion plan could mean for infrastructure investors

On 22 March 2025, German President Frank-Walter Steinmeier signed off on a landmark constitutional reform of Germany's debt brake and a €500 billion fund aimed at revitalizing the country's infrastructure and energy sectors. After receiving approval by the German Federal Parliament (Bundestag) and its upper house (Bundesrat), the legislative changes have come into force upon their publication in the Federal Law Gazette (Bundesgesetzblatt).

The proposed fund is intended boost investment in Germany's critical sectors such as transport, hospitals, energy, education, and digital infrastructure. With a term of twelve years, the fund will be financed through loans and distributed as follows: €100 billion to federal states, €100 billion for climate-related investments via the Climate and Transformation Fund, and €300 billion allocated by the federal government for various infrastructure projects.

The precise allocation of funds and the method for the same will be governed by separate legislative enactments at federal and state level. It is likely that significant opportunities for private companies resulting from the new infrastructure fund will arise, for the precise nature of such opportunities, watch this space for further information as the relevant legislation unfolds.

In this blog post, section 1 will provide an overview of the infrastructure reform, section 2 sets out the likely practical implementation, section 3 discusses the likely impact of the fund for infrastructure reform and section 4 sets out likely next steps.

1. Germany's reforms and budgetary measures

After five years of economic stagnation and increasing global pressures on the security and prosperity of Europe, Germany's parliament has passed a landmark reform to Germany's constitutional spending limits and extra-budgetary measures for energy and infrastructure initiatives. The initiative breaks with over two decades of fiscal conservatism espoused by all major parties and encompasses a series of policies that have the potential to provide €1 trillion of additional borrowing over the next decade:

Reform of Germany's constitutional spending limit on the federal budget: Germany's balanced budget amendment, often referred to as the debt brake (Schuldenbremse), is a fiscal rule that restricts the federal government's structural deficit to 0.35 per cent of the country's GDP. Effectively, much of the fiscal space that did exist could not be utilised to make substantive investments into Germany's economy and was predominantly used to meet the demands of consumptive government expenditures. Until now the debt brake applied to the federal budget in its entirety.

In the future, however, defence expenditures that exceed one percent of Germany's GDP will no longer be covered by this rule. Defence projects can therefore be financed through additional debt. This exemption will also apply to other security-related spending, ie, expenditures in respect of civil protection, cyber defence, intelligence services, and support for countries that have been attacked in violation of international law.

Increased borrowing flexibility for federal states: Germany's debt brake used to prohibit the 16 federal states from running any deficits at all. With the new constitutional amendment, the federal states are given more leeway for their own borrowing: together, they will be allowed to take out loans amounting to 0.35 percent of GDP in the future. At present, this amounts to approximately €15 billion for all the states combined.

EUR 500 billion off-budget infrastructure fund: Under German budgetary law, a special budget, also known as a "special fund" (Sondervermögen), is a separate subsidiary budget that is exclusively intended to fulfil specific and limited tasks of the federal government. It operates independently of the regular budget and is not restricted by the debt brake, allowing it to bypass usual budget restrictions. The proposed fund will have a term of twelve years and will be financed with loans of up to €500 billion.

 In particular, the infrastructure fund consists of following three elements:

• €100 billion will go to the federal states. The precise distribution of the funds will be regulated by a separate law that is to be negotiated between the federated governments and the central government in Berlin.
• Another €100 billion will be earmarked for climate protection and climate-related infrastructure investment and will be managed through the existing Climate and Transformation Fund (Klima- und Transformationsfond).
• The remaining €300 billion will be spent on infrastructure projects at the direction of the federal government.

The €500 billion infrastructure fund is intended to overhaul years of underfunding in a number of sectors, including transport, hospitals, energy, education, and digital infrastructure. The fund suggests an average investment allocation of €40 billion to 42 billion per year, equivalent to 1.0% of the country's GDP. 

Legally, the proposed reforms will be implemented through amendments to Germany's constitution, known as the Basic Law (Grundgesetz). Amendments to Articles 109 and 115 of the Basic Law will exempt defence- and security-related expenditures from the federal debt limitation and grant borrowing flexibility for the 16 federal states. Article 143g will establish the infrastructure fund and provide it with credit authorization to enable borrowing.  

2. Practical implementation

The German government will raise the necessary funds through the issuance of federal bonds on the capital market. The issuance of these bonds will be staggered over a period of up to twelve years, allowing for structured and effective utilisation of the fund. German federal bonds typically have terms of 7, 10, 15, or 30 years, with some federal bonds with 5-year maturities and treasury notes with 2-year terms.

The infrastructure fund is designed to complement, not replace, existing federal budget projects. Only new investments will be financed through the fund, ensuring that the funds are used to achieve substantial improvements rather than merely shifting existing expenditures.

An "appropriate investment ratio" of at least 10 per cent within the federal budget is a prerequisite for authorising loans under the infrastructure fund. These measures are designed to prevent the Government from outsourcing expenditures into the fund to create space in the core federal budget for other (partisan) policies and serve to corroborate Germany's investment ambitions across the special fund and the general federal budget.

The precise allocation of the infrastructure fund will be the subject of further legislative enactments and shaped by political negotiations of the coalition parties.  

3. Impact on infrastructure projects

The fund aims to address decades of underinvestment in critical sectors like transportation, utilities, and energy. Germany's spending plan has the potential to drive key megatrends such as decarbonisation, digitisation and energy transition, while attracting private capital for a variety of infrastructure projects and establishing public-private partnerships for large capex projects.

Germany's years of underinvestment has created the need for substantial investments. The new infrastructure fund can turn this economic challenge into a significant investment opportunity for a variety of stakeholders.

For instance, Deutsche Bahn requires over €150 billion euros for investments in railway infrastructure. To cover maintenance costs alone, a further €80 billion will be required. Highways are in urgent need of funding: Of roughly 28,000 motorway bridges, more than 4,000 need renovation, costing around €60 billion.

Unleashing the potential of the infrastructure fund requires clarity about its allocation to separate sub-sectors of the infrastructure industry and concrete parameters for awarding funds to contracting authorities such as the Autobahn GmbH or Deutsche Bahn.

Additionally, regulatory barriers must be reduced if not removed so as to swiftly translate investment potential into concrete projects. Currently, public procurement programmes often take years to unlock initial investment amounts, resulting in protracted planning processes that may discourage investment in Germany and postpone some of the much-anticipated economic benefits of the Government's spending plan.

The exact scope of the fund's implications will be determined by the negotiations of the German coalition parties for the next governments, currently thought to be the centre-right CDU, centre-left SPD, with possibly the support of the Greens.

4. Next Steps

In light of Germany's fiscal reforms and extra-budgetary measures we are expecting to see new opportunities for infrastructure development. In the short-term, the following steps can be expected:

• Decision on funding allocations: In the upcoming months, the German government will take allocation decision and designate specific infrastructure projects for the first utilisation of the infrastructure fund. The scope and implications of the funding reforms will be determined by the political negotiations in Berlin.
• Design of  framework: In connection with the above, the government will need to develop a model for the disbursement of fund assets that ensures long-term planning security and minimizes political uncertainty.
• Stakeholder engagement and encouragement of public-private partnerships: The government will seek to attract private capital to leverage the impact of its borrowing. It is like that public-private partnerships (PPP) opportunities in relation to large-scale capex project will arise as a result.