By Sarah Marsh
BERLIN (Reuters) – Germany’s outgoing lower house of parliament began a special session on Thursday to debate a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules in Europe’s largest economy to bolster defence.
The winner of Germany’s election last month, Friedrich Merz, wants to secure the funds before a new parliament convenes on March 25, where they risk being blocked by an expanded contingent of far-right and far-left lawmakers.
The prospect of such a spending shift in a country better known for its frugality has rocked markets over the past week, helping lift the euro to five month highs against the dollar.
But the financial package is not a done deal, with Merz’s conservatives and his likely future coalition partner, the Social Democrats (SPD), needing to win over the Greens to secure the two thirds majority required to change the constitution.
Speaking ahead of the debate, senior Greens official Katharina Droege played down the chances of an agreement, saying her party would vote against Merz’s proposals.
Earlier another Greens leader, Britta Hasselmann, told RTL/ntv there had been no progress in negotiations, warning of “serious gaps and errors in the conception” of the debt plans towards, for example, tackling climate change.
The Greens want more assurance that the conservatives and SPD will not use the windfall from the infrastructure fund on policies that pander to their vote base, an accusation Merz has previously batted away.
Merz’s manoeuvre may also get knocked back by the Constitutional Court, which could deliver its verdict as early as Thursday on challenges lodged by the far-right Alternative for Germany and far-left Left party.
Germany’s likely next chancellor says boosting defence has taken on a new urgency due to the prospect of the United States, the country’s longtime security ally, disengaging from Europe under the administration of President Donald Trump.
The boldness of Merz’s statements and the swiftness with which he has reached a deal with the SPD on funding plans augur well for more decisive leadership from Germany, despite his lack of experience in government, some analysts say.
That will be key, they say, for equipping Germany and Europe to deal with growing security challenges including a hostile Russia and more assertive China as well as reviving an economy that has contracted for two consecutive years.
But while the fate of Merz’s plans remains uncertain, they prompted Germany’s IfW economic institute on Thursday to raise its 2026 growth estimate for Germany, anticipating tailwinds from a public spending boost.
IfW, one of Germany’s main economic forecasters, said next year’s gross domestic product would likely increase by 1.5%, up from the institute’s December forecast of 0.9%.
Michael Pfister, foreign exchange analyst at Commerzbank, said he would be carefully watching the outcome of the debate.
“If the fiscal packages come through, then markets expect higher growth in Germany but in the euro area as well because Germany is obviously the biggest economy,” said Pfister.
Euro area benchmark Bund yields hovered near 17-month highs in anticipation of much more debt.
As well as giving Merz’s proposals their first reading on Thursday, the Bundestag lower house of parliament will also consider rival plans from the Greens and the pro-business Free Democrats (FDP) for boosting defence funds.
Second and third readings for the Merz plans are expected next Tuesday, culminating in a vote.
“The Greens’ counter-proposal was most likely about increasing their leverage in negotiations over the next few days without overplaying their hand,” Deutsche Bank wrote in a research note.
“Our base case remains for the reforms to pass with a two-thirds majority over the course of next week, but it is unlikely to be a smooth passage,” it added, noting this would result in “the largest fiscal expansion since German reunification”.
(Reporting by Sarah Marsh, Holger Hansen, Andreas Rinke, Ludwig Burger, Rachel More, Rae Wee, Lucy Raitano; writing by Sarah Marsh and Matthias Williams; Editing by Michael Perry and Gareth Jones)
