BERLIN — Germany's parliament on Tuesday passed a historic bill unlocking a record level of state borrowing for defence and infrastructure through amending the country's constitutionally enshrined fiscal rules.

The vote made it through the parliament with 513 votes in favour — above the 489 votes required.

The law still needs a two-thirds majority in the Bundesrat, Germany's upper house representing the country's states, to become law.

The crucial vote in the Bundestag followed weeks of debate sparked when Merz's Christian Democratic Union (CDU) and would-be coalition partners Social Democrats (SPD) unveiled plans to unleash hundreds of billions in spending through loosening Germany's constitutionally-enshrined "debt brake."

Merz faced a tense race to push the proposal through ahead of the new parliament convening on 25 March, where the far-left Die Linke and far-right Alternative for Germany (AfD) would have the ability to block the package.

The Greens were originally reluctant to offer their support of the bill until Merz last week gave the party guarantees that €100 billion of the special fund would be directed to supporting climate economic transformation measures.

The historic deal marks a shift away from decades of fiscal conservatism. Out of the proposals, defense spending above 1% of Germany's gross domestic product is effectively exempt from the country's "debt brake", which was written into the constitution in 2009.

A €500 billion special fund will also be created to finance infrastructure projects outside of the ordinary budget over the next decade, and give Germany's 16 states leeway to borrow the equivalent of around €15 billion.

Merz — who campaigned against reforming the debt brake throughout his career — has framed his U-turn necessary in response to a changing security landscape.

"Our friends in the EU are looking to us just as much as our adversaries and the enemies of our democratic and rules-based order," Merz said on Tuesday ahead of the vote.

Defence Minister Boris Pistorius defended the decision to lift fiscal rules to invest in Germany's defense, including its woefully underfunded army.

"Our security must not be jeopardized by budgetary constraints," Pistorius said, adding that "anyone who hesitates today is denying reality."

Some of the strongest criticism in parliament on Tuesday came from the AfD and the liberal Free Democratic Party (FDP), the latter who tried to derail the package by suggesting a last-minute change.

The German stock market and the euro reacted positively ahead of the vote, which experts have said has the power to bring Germany out of its two years of poor economic growth.

Most economists are in favor of incurring debt to finance additional security and defense needs, but have repeatedly noted that the infrastructure package should be accompanied, or replaced, by strong reforms in other areas according to economic thinktank Ifo.

Reforms in bureaucracy, pension, energy, as well as addressing the country's dire workforce shortage are desperately needed, experts say.

President of the Berlin-based economic research institute DIW Berlin, Marcel Fratzscher, reiterated to Euronews that, "We need reforms in bureaucracy and the workforce in other areas so that such investments can be implemented at all."

"The package would be a very important step in the right direction, but that alone will not be enough. We need a reform of the debt brake, to bring investments in infrastructure, education, and defence permanently into the federal budget."

The law still needs a two-thirds majority in the Bundestag, Germany's upper house.

Here, the CDU, SPD, and the Greens need the backing of another party to ratify the legislation. — Euronews