Q&A – Germany’s €500bln special fund for infrastructure and climate neutrality

1. What is the fund’s purpose?

2. How was the special fund set up?

3. How is the fund structured?

4. Who oversees the money’s allocation?

5. What role do climate and energy play?

6. What major risks do observers link to the special fund?

7. Where will the money come from?

8. How will the plans affect the EU?

9. Does Germany get a true debt brake reform – or merely plugs for budget gaps?

How is the fund structured?

Special funds are established instruments in the government’s budgeting process, and the latest one on infrastructure and climate neutrality is already the 27th in modern-day Germany.

Projects submitted between the beginning of 2025 and the end of 2036 can be covered by the fund. This means the federal government and the states will have roughly 42 billion euros per year on average to spend until the end of the fund’s runtime - or about eight billion euros more annually for the climate from the 100 billion going into the CTF.

The law will apply retroactively for 2025 and the total investments made in that year would reach 37 billion euros, the government said. For comparison, total federal expenditures stood at 465 billion euros in 2024.

There are seven target areas for the fund’s 300-billion-euro infrastructure wing and the 100 billion euros paid out to the states:

1. Civil protection

2. Transport

3. Hospitals

4. Energy

5. Education and science

6. Research and development

7. Digitalisation

While many of the infrastructure projects overlap with climate and security policy aims, funds going to the CTF are reserved for “additional investments into reaching climate neutrality by 2045.” The CTF was introduced in 2011 as a financing vehicle for the government’s long-term energy policy plans and is managed by the finance ministry (BMF). “Implementing the individual measures will be a task for the relevant other ministries,” the finance ministry told Clean Energy Wire.

Who oversees the money’s allocation?

Laws governing the special funds are generally decided by parliament and spending is evaluated by the Court of Auditors (Bundesrechnungshof), the country’s financial watchdog. As ring-fenced funds dedicated to a specific purpose, they have a definite runtime and thus offer a high degree of planning security for recipients. However, rededicating 60 billion euros from another special fund to the CTF had been one of the reasons for the previous government’s collapse.

For the 500-billion-euro package, finance minister Klingbeil therefore set up an “investment and innovation council” made up of academics, economists, board members, workers council representatives and local politicians to advise the government on the fund’s most efficient and targeted use. “The money is there now, but implementing this will not be a sure-fire success,” Klingbeil told Handelsblatt newspaper.

The law also prescribes the monitoring of the disbursed funds’ effectiveness. This includes a cost-benefit analysis in the planning phase, progress reports after four and eight years, respectively, and a final review after the fund’s runtime has ended. “The individual measures therefore will require sufficiently detailed target setting and definitions for the methodological approach of success monitoring,” the draft said.

What role do climate and energy play?

One out of every five euros in the fund will be transferred into the CTF. With the additional ten billion euros allocated to the CTF annually until 2034, the instrument dedicated specifically to climate policy spending will see a substantial increase. The CTF currently draws its income from the auctioning of emissions allowances in the European Emissions Trading System (€6.7 bln in 2025) and from the proceeds of national carbon pricing (€15.4 bln).

The CTF’s general purpose is to support measures in the buildings sector, in industrial transformation, financial relief for energy customers, climate-friendly mobility, the build-up of a national hydrogen industry, and natural climate protection projects.

Examples for funding in 2025 include about 308 million euros for expanding electric mobility, 105 million euros for climate-neutral aviation, 71 million euros for model projects in public transport, or 41 million for the energy efficiency retrofitting of city infrastructure.

It also covers 3.4 billion euros for supporting natural gas customers or 2.8 billion euros in grants for energy-intensive industries for compensating higher electricity costs due to carbon pricing.

In addition, a large part of the 300 billion euros channelled into the fund’s infrastructure wing will also affect climate-relevant policy areas, such as energy generation, transport and digitalisation. The finance ministry’s economic plan for 2025, for example, reserves about 7.6 billion euros in the infrastructure fund for railroad modernisation works and sets aside over 62 billion euros in four instalments until 2029.

For “climate friendly newbuilds in the low-price segment,” the economic planning sets aside 20.5 million euros in 2025 but reserves more than 643 million euros until 2035. For the broader support category “climate friendly construction,” the plan includes 243 million euros in 2025 and another roughly 1.1 billion euros in the years until 2035.

Fossil fuel projects are also covered by the fund: 835 million euros in the 2025 planning are earmarked for funding the country’s liquefied natural gas (LNG) import infrastructure and 20 million for the Schwedt oil refinery, which was hit hard by the economic sanctions on Russia following the invasion of Ukraine. It will have another nearly 379 million euros reserved for the next years in a bid to “ensure energy supply security in northeastern Germany.”

What major risks do observers link to the special fund?

Additionality was agreed as a condition with the Green Party when setting up the fund to prevent the government from using the new debt to plug gaps in the regular budget. The condition was agreed to be met if the core budget already features an investment share of ten percent, meaning all debt-financed projects should be counted on top of this threshold.

Chancellor Merz and minister Klingbeil repeatedly stressed that this condition would be met to counter criticism that the governing parties had bypassed the debt brake for short-term political gains. However, several observers have voiced doubts over whether this promise will be kept.

Economic research institute IW said the government clearly intended to plug holes in the budget by redirecting funds. The special fund had earmarked 18.8 billion euros for supporting Germany’s national railway company Deutsche Bahn in 2026. Simultaneously, the core budget’s contribution to the railroad network will shrink by 18.7 billion euros. According to IW, similar reshuffling affected motorway bridge modernisations, broadband internet connections or hospital support. At the same time, funds channelled into the CTF for the most part would not end up covering additional investments, the institute said. “The full extent of this practice remains unclear because it is difficult to track the transfer of expenditure between the core budget, the special fund and the CTF,” IW concluded.

In a separate analysis, IW found that a massive lack of up to 10,000 civil engineers needed to implement the projects is set to lead to further difficulties for planning, licensing, and implementing construction projects worth about 30 billion euros per year. 

Research institute ifo also found that the government was planning to violate the principle of additionality. The previous government had earmarked about 53 billion euros for investments in 2025, while Merz’s coalition reduced this figure by about 16 billion euros and covered projects through the special fund instead. While this would increase the government’s liquidity in the short run, “it shifts repayment duties to future generations and conceals the need for reforms,” ifo researcher Emilie Höslinger said. In a separate statement, ifo said that the 100 billion euros paid out to federal state governments could likewise end up covering projects originally included in the core budget to free up money for other purposes.

In a review published in early September 2025, the Court of Auditors also criticised that the required definitions for success monitoring would be “meaningless” in their current form, particularly regarding the 100 billion euros directly provided to the states, news magazine Der Spiegel reported. The draft did not require state governments to ensure that their investments are additional. Neither did it allow the federal government to intervene and block funding for projects with a negative cost-benefit analysis or to reclaim money if it was spent off target.

In the government’s financial planning, the transport ministry’s budget shrinks by about six billion euros in 2024 to 38 billion euros in 2025 and then to 27 billion euros in 2029. The head of Germany’s parliamentary committee for transport, Tarek Al-Wazir from the Green Party, said the special fund was at risk of becoming a “fraud package,” Frankfurter Allgemeine Zeitung newspaper reported. “Instead of modernised bridges, you now get lower taxes for restaurants,” Al-Wazir commented, referring to a controversial step by the coalition announced as support for the food service industry.

At a hearing in parliament in late August, researcher Christian Böttger, who was nominated by Merz’s conservative CDU/CSU alliance to assess the special fund, also criticised that the funds were transferred from the core budget to the special fund, especially with respect to railroad investments. The approach would therefore not deliver a “big bang” to allow the government to fulfil its promises.

Several support programmes for new and climate-friendly construction that were set up under the previous government will also be shifted to the special fund, along with expenses for the maintenance of Germany’s LNG terminals that used to be covered by the core budget. Likewise, expenditures for the healthcare sector that were supposed to be financed by insurance premiums will be shifted to the special fund.

In an expert opinion published already in May, the government’s council of economic advisors warned that “consumption expenditures” listed in the coalition treaty, such as reintroducing refunds for agricultural diesel fuel, expanding a special pension scheme for mothers, or a permanent reduction of value added tax in the food service industry all bear the risk of misusing money freed up by the special fund. “This would severely diminish the financial package’s growth effects,” the advisors concluded. All these projects, meanwhile, have been agreed on by the government.

Where will the money come from?

The special fund’s volume equals about 6,000 euros for each of Germany’s roughly 83 million inhabitants. To raise this money, Germany relies on issuing government bonds, which is expected to substantially increase its national debt. In 2024, the country’s debt-to-GDP ratio was 62 percent. According to economic research institute IW, this figure could increase to about 85 percent by 2037, depending on the pace of growth of Germany’s economy in the coming years. However, the institute said that this ratio would still be “moderate” in an international comparison.

Germany continues to enjoy an excellent rating on international credit markets. This reflects its perceived ability to repay these loans, which amongst other things also depends on future GDP growth. In the law, the government says repayment should commence “no later than 2044.” The economy ministry (BMWE) forecast in spring 2025 that the country's economic stagnation of the past two years would persist throughout the year. However, it added that the special fund could have "stabilising effects and increase planning security for households and companies."

Germany’s leading economic research institutes in a joint analysis released in late September said hopes for growth picking up in 2026 mostly stemmed from Germany’s debt-financed spending spree, which they warned must not obscure the unchanged need for deeper reforms.

The Court of Auditors early on warned that the proposal entails “macroeconomic and social risks” and could only be a short-term fix for urgent challenges. They cautioned that relying on debt instead of revenues risks making Germany “live beyond its means.” This could ultimately translate into paying higher interest rates and further undermine flexibility in the core budget.

The government promised to make “careful” use of its new debt. It will carry out austerity measures at the same time. This included changes to unemployment benefits, savings in administrative staffing, reducing the number of special government envoys, cutting development aid, fighting illegal employment and VAT fraud.

How will the plans affect the EU?

In the past, Berlin’s European partners have criticised German state spending that benefits mostly the country's businesses, while poorer EU member states lack the financial means to do the same for their companies, for example during the pandemic or the energy crisis. However, a massive boost to infrastructure spending in the bloc’s largest and centrally located economy could have significant knock-on effects for the rest of the EU, observers have said. This is due to expected improvements in transport linkages across the country and to rising demand for goods and services from European neighbours that go into the infrastructure overhaul.

In its economic forecast in spring 2025, the European Commission noted that the special fund “has the potential to significantly boost economic growth over the next decade” in Germany, with a possible GDP growth of up to 2.5 percent by 2035. At the same time, the impact on additional public debt could remain “relatively contained,” assuming that the funds are “allocated to productive projects” with high gains. And positive effects would not be limited to Germany, the Commission said: total EU GDP could increase by up to 0.75 percent by 2035 due to the fund.

However, the Commission warned against using funds for consumption instead of investments. This could substantially diminish the positive effects and instead inflate the country’s debt-to-GDP ratio. “As long as the emphasis on productive use is maintained, a speedy fruition of the fund would yield the most economic gains,” the Commission concluded. It warned that implementation will also hinge on the availability of skilled labour, efficient planning and permitting, and the ability of public institutions to administer disbursements effectively.

The Brussels-based think tank Bruegel analysed the fund’s compatibility with EU fiscal rules, which require sovereign debt to remain below 60 percent of GDP. It found that “full use of the borrowing space under the new debt brake would conflict with EU fiscal rules in a very fundamental sense.” According to the think tank, current EU fiscal rules would severely limit Germany’s ability to spend all the money earmarked under the special fund if expenditures are not offset by cuts elsewhere in the budget and no new reform of EU fiscal rules is made.

The German government’s economic expert council pointed out that the package could ultimately violate EU debt rules, should the Commission find that the money disbursed went into consumption rather than investments. The German Trade Union Association (DGB) immediately after the government’s inauguration in May 2025 urged the EU to not undermine the German parliament’s consensus on expanding investments in infrastructure at a time when defence budgets are growing across Europe. “This would be fatal and could fan anti-European ressentiments,” the association warned.

Does Germany get a true debt brake reform – or merely plugs for budget gaps?

Many stakeholders, including the government’s economic advisors, industry representatives, the federal states, civil society groups and most citizens have come out in favour of reforming the debt brake. However, critics have said that the Merz government’s approach mainly constitutes a workaround that does not fundamentally change the debt limits.

The debt brake can already be suspended if parliament declares an emergency, as for example was the case during the coronavirus pandemic.

A long-term adaptation of the debt rules is popular with the SPD, the Greens and the Left Party but highly controversial for parts of the CDU/CSU, which had campaigned heavily on its insistence on debt rules and the previous government’s inability to balance the budget without borrowing new money.

In July, finance minister Klingbeil announced that a commission will be set up to work out viable reform steps for the debt brake. The aim would be to enable Germany to make “permanent additional investments” in the special fund’s target areas beyond the agreed runtime while keeping the budget “sustainable.”

When presenting the treasury’s budget proposal for 2026, Klingbeil said “major changes” to the country’s spending habits cannot be avoided. For the following year, there already was a gap of 30 billion euros in budget planning despite the special fund. Already in July, the Court of Auditors had warned that the CTF likewise faces gaps in covering its financial liabilities, even when taking the special fund’s contributions into account.