EU Council clears Germany’s defence spending plans

Germany’s Chancellor Friedrich Merz receives Belgian Prime Minister Bart De Wever (not pictured) at the German Chancellery in Berlin on August 26, 2025 | Photo: Britta Pedersen/dpa

The Council of the European Union has approved Germany’s medium-term fiscal-structural plan, endorsing the country’s maximum net expenditure path for the next five years and granting an extension of its fiscal adjustment period to seven years. The Council also activated the national escape clause under the Stability and Growth Pact (SGP) to give Germany temporary flexibility to increase defence spending while maintaining debt sustainability.

According to the Council statement, Germany’s plan outlines its fiscal trajectory along with the reforms and investments needed to strengthen debt sustainability and support economic stability. Under the revised economic governance framework, each member state must submit a medium-term fiscal-structural plan that sets out its expenditure path and the measures it intends to take to meet EU fiscal rules.

The net expenditure path, which serves as the main operational indicator for EU-level fiscal surveillance, will guide Germany’s budgetary policy over the next five years. This ceiling will frame national fiscal planning and will be used to assess whether the country is maintaining sound public finances in line with EU rules.

In parallel, the Council approved the activation of the national escape clause for Germany. The clause allows limited temporary deviation from the standard fiscal requirements under the SGP for specific defence-related expenditure. The measure covers a period of four years, providing flexibility equivalent to a maximum of 1.5% of GDP annually.

Under this clause, Germany will not face an excessive deficit procedure if its government deficit exceeds the 3% reference limit established by the EU Treaties, provided that the excess is the result of increased defence spending. The clause does not apply to non-defence expenditure, and member states remain obligated to comply with the broader fiscal discipline and reporting requirements of the economic governance framework.

Germany is among 16 EU member states whose requests for activation of the clause have been approved. Other countries include Belgium, Bulgaria, Croatia, Czechia, Denmark, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia, and Slovenia.

The national escape clause is part of the EU’s updated economic governance system, which links fiscal flexibility with the European Semester process and the medium-term budgetary framework. The clause can be applied when exceptional circumstances affect public finances, allowing temporary deviation from fiscal targets to accommodate specific national policy priorities such as defence or crisis response.

According to the Council, use of this flexibility is intended to support the enhancement of Europe’s collective defence and security capabilities. It is also aimed at addressing capability gaps, reducing strategic dependencies, and strengthening the European defence industrial and technological base.

The clause’s activation follows the broader reform of the EU’s economic governance framework, adopted in early 2025, which introduced new mechanisms for fiscal monitoring and country-specific expenditure paths. The framework integrates the European Semester process and provides clearer conditions for when flexibility clauses, such as the national escape clause, may be applied.