Germany’s Friedrich Merz agrees spending deal with Greens

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Germany’s chancellor-to-be Friedrich Merz has agreed a deal with the Green party to inject hundreds of billions into the country’s military and ageing infrastructure, paving the way for his spending package to be adopted by parliament next week.

The Greens, who earlier this week had threatened to block the deal, secured concessions from Merz, including more investment in the green transition and extending the additional defence spending to cover support for Ukraine, civil protection, information technology and intelligence agencies.

“There will no longer be a lack of financial resources to defend freedom and peace on our continent,” Merz said on Friday. “Germany is back. Germany is making a major contribution to defending freedom and peace in Europe.”

The co-leader of the Greens in the German parliament, Katharina Dröge, said her party wanted “to ensure that the money that is borrowed is actually invested in the future, in a modern economy”. As part of the compromise, one-fifth of a planned €500bn infrastructure fund to be doled out over the next 12 years will be allocated to the green transition.

Merz needed the Greens’ support to pass his stimulus package with a two-thirds majority in an emergency session of the old parliament on Tuesday.

His Christian Democrats (CDU/CSU) and his likely coalition partner, the Social Democratic party (SPD), still command a supermajority with the Greens in the old assembly — but no longer do so in the new Bundestag, which was elected in February and is set to take office this month.

Merz last week agreed with the SPD to loosen the country’s strict constitutional borrowing cap for defence spending and to set up a €500bn fund to modernise Germany’s transport, energy, health and communications infrastructure — a move upending more than two decades of fiscal conservatism.

The plan, which requires constitutional changes, would boost Europe’s largest economy, which has been stagnating for more than five years, and send a signal to Europe that Germany is ready to play a bigger role in the continent’s security, economists and defence experts have said.

“In substance, it creates significantly more leeway for the government both in infrastructure and defence,” said Armin Steinbach, professor at HEC. “The new fiscal ceiling for Germany’s budget will be the EU fiscal rules, no longer the German debt brake.”

German borrowing costs have soared since Merz outlined his spending plan, which allows unlimited borrowing for defence spending, as investors bet on a massive rise in bond issuance and brighter economic prospects for Germany.

Yields on 10-year Bunds rose as high as 2.94 per cent on Friday, their highest level since October 2023. The euro climbed 0.4 per cent to $1.089, extending its gains against the dollar this year to more than 5 per cent.

The Greens earlier this week said they would oppose the package, prompting Merz to signal he was ready to make concessions.

“This compromise was probably the biggest mountain [Merz] had to climb, but more mountains remain next week,” Steinbach said.

Germany’s constitutional court is due to rule on legal challenges filed by the far-right Alternative for Germany (AfD) and far-left Die Linke to prevent the outgoing parliament from taking such decisions.

The constitutional amendments must also be adopted by the upper house of parliament, which represents the country’s 16 states, at a two-thirds majority. The Bundesrat is due to vote on the package on March 21.

The CDU, SPD and Greens, which together fall short of two-thirds of the seats in the Bundesrat, will need to win over either the conservative Free Voters, who govern in Bavaria with CDU’s sister party, the CSU, or the liberal FDP, which is in coalition governments in two states. Both the FDP and the Free Voters are traditionally opposed to relaxing the country’s debt brake.

Additional reporting by Ian Smith in London