Merz ally optimistic as clock ticks for German fiscal bonanza

Berlin — A senior ally of Germany’s likely next chancellor Friedrich Merz was optimistic on Tuesday about securing support for a massive increase in state borrowing this month, seeing the basis for a deal on defence with the Greens party after emergency talks.

The clock is ticking for Merz to persuade legislators in the outgoing parliament to back plans to unshackle Germany’s tight borrowing limits as a way to lift Europe’s largest economy out of its funk and pump hundreds of billions of euros into defence.

The Greens party, whose votes are needed to pass the measures in the outgoing parliament, withheld their support and put forward their own proposals on Monday night.

But Thorsten Frei, a senior legislator in Merz’s conservative CDU/CSU bloc, said the two sides were not far apart. “Now we have a foundation on which we can move towards each other,” he told Deutschlandfunk radio.

It was not the case that the two sides are “miles apart and that you cannot possibly agree on anything,” he added.

Separately, sources in both Merz’s conservatives and their likely coalition partner in the next government, the Social Democrats, said a deal might not be possible this week but could still be clinched at the last moment.

The Greens’ refusal to back sweeping reforms to debt rules and a special €500-billion infrastructure fund could derail a spending bonanza that had excited markets and could rapidly transform the global bond trade.

Merz has stressed his sense of urgency over increasing defence spending. After winning elections last month, he said it was “five minutes to midnight” for Europe, warning that a hostile Russia and an unreliable US could leave Europe exposed.

The Greens have accused Merz of using European security as a pretext to fund measures to please his political base, such as tax cuts and restoring diesel subsidies for farmers. They demanded more money for climate protection, affordable housing and creating opportunities for Germany’s poorest.

Merz wants to push through his plans in the outgoing parliament because in the new Bundestag that begins on March 25, they would become harder to pass with the necessary two-thirds majority. An enlarged contingent of far-right and radical left legislators is threatening to block them.

“With all these developments over the last 24 hours, the risk that CDU/CSU and SPD will not get a 2/3 majority for their fiscal plans has increased,” said Carsten Brzeski, the global head of macro at ING.

“The last few days have reminded me of someone borrowing lots of money to buy a highly sophisticated sports car, getting into the car, starting the engine with a vroom, but then killing the engine seconds later. A cringey moment indeed, but the sports car could still be restarted and speed away.”

Investors and some economists have long urged Germany to reform its constitutionally enshrined state borrowing limits — known as the “debt brake” — to free up investment.

The reform would mark a rollback of borrowing rules imposed after the 2008 global financial crisis that many see as an outdated fiscal straitjacket.

Merz wants to amend the constitution so defence expenditure above 1% of economic output is exempted from debt brake rules, and for a commission separately to develop proposals for broader debt brake reforms to boost investments permanently.

The parliamentary group of the Greens instead drafted a law that would foresee spending on “defence and security policy tasks” above 1.5% of GDP exempt from the debt brake — with security defined more broadly to include intelligence capabilities, foreign aid and safeguarding tech systems.

Frei said the proposal by the Greens on 1.5% was a “very plausible suggestion” and other details needed to be looked at individually.

“There is a possibility that the Greens might fold. There is a lot of pressure from the media,” said a note by the Eurointelligence think-tank.

“It is also not in their character to throw the wrecking ball. Their biggest fear is to be criticised for being extreme and unreasonable.”

Reuters