By Maria Martinez
BERLIN (Reuters) – The far-right Alternative for Germany (AfD) and Germany’s Left party jointly secured one third of seats in the new parliament that is required to block changes to the constitution, including a loosening of the country’s debt brake.
The debt brake restricts budget deficits to 0.35% of gross domestic product, though that excludes top-ups of the special fund for defence or the creation of a new special fund.
However, both the AfD and the Left oppose military aid to Ukraine and with their new-found strength in the Bundestag lower house they could veto increased contributions to the defence fund, creating tensions with Germany’s NATO allies, including the Trump administration which wants Europe to spend much more.
German conservatives under likely next chancellor Friedrich Merz vowed on Monday to move quickly to try to form a coalition after winning the most votes in a national election, but gains by both the AfD and far-left parties will complicate his task.
Holger Schmieding, chief economist at Berenberg, said that Germany may struggle to find the fiscal space to raise spending on defence while also easing the tax burden for workers and firms.
“A failure to ramp up military spending could get Germany into deep trouble with its NATO partners,” Schmieding said. “By infuriating U.S. President Donald Trump, it could also add to the risk of a U.S.-EU trade war.”
The Left would be open to loosening the debt brake but not to allow greater defence spending, economists say.
“The Left would like to ditch the debt brake. However, its agenda – soak the rich, spend more on welfare and less on defence- is the very opposite of the Merz agenda,” said Carsten Brzeski, global head of macro at ING.
FISCAL CHALLENGE
In order to increase defence spending from the current 2% of GDP to 4%, for example, the federal government would have to cut non-defence spending by a quarter if this were not to be financed by additional debt, said Joerg Kraemer, chief economist at Commerzbank.
A new Merz-led government might win the backing of the Left Party if it were to combine a special fund for the armed forces with a special fund for higher infrastructure spending or to generally relax the debt brake by excluding infrastructure investments from the debt rule, Kraemer said.
If this did not succeed, Kraemer said the only other politically feasible option would probably be to suspend the debt brake by invoking an “extraordinary emergency situation”, which is possible with a simple parliamentary majority.
The most likely outcome of Sunday’s election is a coalition of Merz’s conservative bloc and the Social Democrats (SPD), who came in third, after the AfD surged to a historic second place.
(Reporting by Maria Martinez; Editing by Ludwig Burger and Gareth Jones)
