After making a mockery of the German democratic process, as Bloomberg explained not once...

... but twice...

... on Tuesday, Germany's outgoing parliament passed a record increase in government borrowing, the biggest in German history, including a sweeping change to the country's debt rules.

Late on Tuesday afternoon, chancellor-in-waiting Friedrich Merz's conservatives and the centre-left Social Democrats, currently in talks to form a government following last month's election, had proposed a €500BN fund for infrastructure and changes to borrowing rules to bolster defence and revive growth in Europe's largest economy. 

The controversial legislation was approved in the lower house of parliament with 513 votes out of a total of 733, clearing the two-thirds threshold required for constitutional changes.

The bill will release defense spending from debt restrictions, creating a potentially unlimited supply of money to rearm to deter Russia, or at least limited by how long it takes for the German bond market to crack because unlike the US, the Euro is not the world's reserve currency. And judging by the recent surge in bund yields - not driven at all by a stronger economy but merely by term premium and fears of even more debt - it won't take too long.

It would also set up a €500 billion ($546 billion) fund to invest in the country’s aging infrastructure.

Commenting on the decision Deutsche Bank's Robin Winkler  said that“after much nail-biting over the last fortnight, Germany's outgoing parliament today decided to reform the constitutional debt brake. In our view, this is a historic fiscal regime shift, arguably the largest since German reunification. Yet, as with reunification, a fiscal expansion does not guarantee success: the next government will need to deliver structural reforms to turn this fiscal package into sustainable growth.” 

“This is possibly the biggest spending package in the history of our country,” Lars Klingbeil, the co-leader of the Social Democrats and a likely cabinet member in the next governing coalition, said during the debate in Berlin. “Germany must take on its leadership role in Europe.”

To secure the necessary two-thirds majority in parliament, the outgoing German government (which is rushing to get a deal done before March 24 when the new incoming government would have blocked it) had to integrate last-minute demands from the Greens party into their proposal, a plan which was originally meant to fund "defense" against Russia, but has since mutated into a debt-funded free-for-all, with all the participating parties promised generous pork to get their approval.

The biggest irony is that this kind of debt/deficit-funded spending is precisely what incoming premier Merz had campaigned against, signaling that in its terminal slide to oblivion, Europe - overrun by foreigner - will first turn hard left before running right into the abyss.

The legislation now goes to the Bundesrat upper house, which represents Germany's 16 states, and is set to vote on Friday. 

As we reported previously, the vote in the Bundesrat - the second chamber comprising the sixteen state governments - is expected to take place on March 21. The session is scheduled to start at 9.30 am CET (see schedule). The eventual fiscal compromise is likely to entail a significant fiscal boon for the federal states, with as much as €200 bn of the off-budget infrastructure fund to go to the federal states in addition to their net borrowing cap being lifted from 0% to 0.35% of GDP. Thus, they should have a clear incentive to vote for it.

In the Bundesrat the vote will mainly depend on the support of the Greens and the Free Voters, the CSU's junior coalition partner in Bavaria.