Chancellor-to-be Friedrich Merz has agreed a deal with his likely coalition partner to inject hundreds of billions in extra funding into Germany’s military and infrastructure, in a “fiscal sea-change” designed to revive and re-arm Europe’s largest economy.

In an announcement that came just over a week after he won federal elections, Merz said late on Tuesday that his Christian Democratic Union (CDU), its Bavarian sister party and the rival Social Democrats (SPD) will jointly present a bill in parliament next week to relax the country’s strict borrowing rules.

A provision would exempt defence spending above 1 per cent of GDP from the “debt brake” that caps government borrowing, allowing Germany to raise an unlimited amount of debt to fund its armed forces and to provide military assistance to Ukraine.