By Holger Hansen, Markus Wacket and Andreas Rinke
BERLIN (Reuters) – German Chancellor-in-waiting Friedrich Merz said on Friday he had secured the crucial backing of the Greens for a massive increase in state borrowing, clearing the way for the outgoing parliament to approve it next week.
Merz’s conservatives and the Social Democrats, who are in negotiations to form a government after an election last month, had proposed a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth in Europe’s largest economy.
With the Greens, they now have the two thirds majority necessary to pass constitutional amendments, with a vote scheduled for next week.
Merz has justified the need to push the package through the outgoing parliament after recent shifts in policy in the United States under President Donald Trump, warning that a hostile Russia and an unreliable U.S. could leave the continent exposed.
“It is a clear message to our partners .. but also to the enemies of our freedom: We are capable of defending ourselves,” Merz, whose conservatives won the election, told a news conference.
“Germany is back. Germany is making a significant contribution to the defence of freedom and peace in Europe,” he added.
With one hurdle cleared, the constitutional court still has to rule on whether an outgoing parliament can pass such consequential measures and whether lawmakers have sufficient time to thoroughly assess them. A ruling is expected before the vote on Tuesday.
News of the deal lifted euro zone government bond yields, shares and the euro on expectation the borrowing plan would boost the wider European economy. Germany’s benchmark DAX stock index was up almost 2%, while the mid- and small-cap indexes rose over 3% each. The euro rose 0.5% – taking its gains so far this month to 5%.
DEBT BRAKE ‘BURIED’
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 compromise reached with the Greens includes the allocation of 100 billion euros for the climate and economic transformation fund from the 500 billion euros earmarked for infrastructure, he said.
It also includes a change to the constitution that would see expenditures for defence, civil and disaster protection, intelligence services, information security exempt from borrowing limits – so-called ‘debt brake’ – if they exceed 1% of economic output.
The reforms would mark a rollback of those debt rules, imposed after the 2008 global financial crisis but since criticised by many as outdated and putting Germany into a fiscal straitjacket.
“With today’s plan, the debt brake might not be entirely dead but rather buried alive,” said Carsten Brzeski, global head of macro at ING.
“The only limiting fiscal rule for the German government will be the (EU) Stability and Growth Pact. And we know from past experiences that these rules can be soft as butter if needed.”
(Reporting by Andreas Rinke, Markus Wacket, Holger Hansen, Thomas Escritt, Rachel More, Miranda Murray and Friedrike Heine; Writing by Sarah Marsh; Editing by Toby Chopra)
