What Germany's 0.35% Debt Brake Cap Exempts: Defence Above 1% of GDP and a Special Fund

Germany's debt brake is written into the Basic Law. Article 115 limits how much new credit the federal government can take on in a year, measured against the size of the economy. Since March 2025 the limit has been loosened in specific ways: large defence spending and a special fund of up to €500 billion now sit outside it.

The rule matters beyond Germany because the yields on federal bonds, called Bunds, have tended to move with those of other euro-zone bond markets. An announced change in German borrowing plans can move yields across the currency bloc, as a sharp rise in the 10-year Bund yield in March 2025 showed.

The Structural Cap in Article 115

Article 115 sets the core limit. Federal revenue from credit may not exceed 0.35 percent of nominal gross domestic product, measured on a structural basis. The text requires budget effects of the business cycle to be counted symmetrically in upswings and downswings.

Deviations from the permitted ceiling are recorded on a control account. Burdens above 1.5 percent of GDP must be brought down in line with the economic cycle.

The article also contains an emergency clause. For natural disasters or exceptional emergencies beyond the state's control that significantly affect public finances, the ceiling can be exceeded by a majority of Bundestag members. The decision must include a repayment plan, and repayment must follow within an appropriate period.

What the 2025 Reform Moved Outside the Cap

The Bundestag adopted the reform on 18 March 2025 with 513 of its 733 members in favour, above the two-thirds needed for a constitutional change. The Bundesrat approved it on 21 March 2025. According to Noerr, the Greens were needed to reach the two-thirds threshold.

Under the new Article 115, only defence spending up to 1 percent of GDP stays under the debt brake. Spending above that line is exempt. The exemption also covers civil defence and protection, intelligence services, IT system security and aid to states attacked in breach of international law. Aid for Ukraine is only partly exempt, according to Noerr.

Noerr estimates that roughly €40 billion of defence spending stays inside the normal limit. A Greens proposal to set the threshold at 1.5 percent of GDP was not adopted.

The reform also changed the rule for the states. The Länder may collectively borrow up to 0.35 percent of GDP under their structural limit. The Bundestag must set the details in federal law, so the split between states is not yet settled.

The €500 Billion Special Fund and Its Conditions

The special fund, the Sondervermögen, can total up to €500 billion, financed with borrowed money. Its purpose is additional investment in infrastructure and additional investment toward climate neutrality by 2045. Noerr reports that the funds can be spent over twelve years, up from the ten years in the original proposal.

Investment counts as additional only if the regular budget earmarks at least 10 percent of federal spending for investment, excluding the special fund and financial transactions. According to Noerr, the test is meant to keep planned investment from being moved out of the federal budget and into the fund.

Clean Energy Wire reports that €100 billion goes directly into the Climate and Transformation Fund, the government's main vehicle for energy transition investments. Noerr reports a further €100 billion for the federal states for infrastructure. The breakdown of the remaining amount is not confirmed in the sources used here.

Bund Supply in 2026 and the 2027 Draft

LBBW Research reported in December 2025 that the federal issuance plan for 2026 comes to around €512 billion through auctions, and up to €530 billion including three conventional syndicates. It described this as a record. LBBW puts 2025, the current year, at €425 billion.

Federal government bonds with maturities of two years and longer are expected to reach about €350 billion in 2026, up from €290 billion in 2025. LBBW also reports that the Bund is adding a 20-year bond to its range, and that the increase in issuance is split roughly two to one between longer-term capital-market instruments and shorter-term money-market instruments.

The federal cabinet approved the 2027 draft budget on 6 July 2026. Investing.com reports total spending of €555.4 billion, core-budget new borrowing of €118.7 billion, and special fund borrowing of €54.9 billion for infrastructure and €30 billion for defence. Total borrowing comes to €203.6 billion. Special funds therefore account for about 42 percent of the total.

Core defence spending rises to €109 billion in 2027 from €82.2 billion in 2026, and investment spending reaches €117.5 billion, up from €78.9 billion in 2025. Investing.com reports these as cabinet-approved figures. The sources used here do not report parliamentary approval of the 2027 draft.

Yields, Euro-Zone Spillovers and What Is Not Yet Quantified

The market reaction came quickly. Friedrich Merz and the heads of the CSU and SPD announced the agreed defence exemption and a fund of up to €500 billion at an evening press conference on 4 March 2025. On 5 March the 10-year Bund yield rose 30 basis points, which BNP Paribas Economic Research describes as the largest move since the fall of the Berlin Wall. The yield kept rising for several days and peaked on 11 March.

BNP Paribas finds that the move in German yields had sizeable spillover effects across euro-zone bond markets. It says higher Bund yields trigger a portfolio rebalancing by investors.

Noerr reports that a Bundestag resolution urged the federal government to set up an expert commission to propose a modernised debt brake.

This article does not include a figure for the effect of the rule on euro-zone growth or on company investment. The budget and issuance figures above cover government spending and borrowing only.