Germany's election-winning conservative CDU/CSU bloc, led by Friedrich Merz, and the Social Democrats (SPD) have reached an agreement in principle with the Greens on a significant increase in state borrowing ahead of next week’s parliamentary vote.

The debt reform plan, proposed by the conservatives and the SPD, aims to exempt defense spending from Germany's constitutional debt brake and establish a €500 billion ($545 billion) fund for infrastructure investment.

The compromise also allocates €100 billion to the climate and economic transformation fund.

With backing from the Greens, Merz is expected to secure the two-thirds parliamentary majority needed for the constitutional amendments in next week’s vote.

"Germany is back," said Merz, announcing the agreement on debt reform. 

"It is a clear message to our partners and friends, but also to our opponents, to the enemies of our freedom: we are capable of defending ourselves and we are now fully prepared to defend ourselves," he said.

Merz also said he expects the country to release €3 billion ($3.27 billion) in military aid to Ukraine once the upper house passes the debt reform.

"There will be no shortage of financial resources to defend freedom and peace on our continent," Merz stressed. "Germany is making its major contribution to the defense of freedom and peace in Europe."

Merz, whose conservative bloc is negotiating with the SPD to form a new government after last month’s elections, aims to secure the funds before the new parliament convenes on March 25. After that date, the CDU/CSU’s alliance with the SPD and Greens would no longer hold the majority needed to pass the measure.

Social Democrat co-leader Lars Klingbeil said a major government borrowing and investment push was a "powerful boost" for Europe's largest economy.

"We have laid the foundation for Germany to get back on its feet and protect itself," Klingbeil said after his SPD agreed with conservatives and Greens on the historic debt package.

Green parliamentary group leader Katharina Dröge said the €100 billion, which must be spent on new measures rather than to fill budgetary holes,  "will make a difference" as the money would be "channelled in the right direction." Though the Green will not be part of the next government, she said negotiations to reach Friday's compromise would allow ministers in the future government to "do the right thing."

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