By Thomas Escritt
BERLIN (Reuters) – Germany’s conservative leader and would-be next chancellor Friedrich Merz plans to reform restrictive borrowing rules in a fiscal policy sea-change with support from the Social Democrats (SPD), his likely coalition partner. But things could still go wrong.
WHAT ARE THE CONSERVATIVES AND SOCIAL DEMOCRATS PLANNING?
They want to create an off-balance-sheet special fund worth 500 billion euros ($543 billion) to finance infrastructure, and exempt defence spending above 1% of economic output from a constitutional “debt brake” spending cap.
DO THEY HAVE THE VOTES?
Both measures need the support of two-thirds of the Bundestag, the German parliament. In the old Bundestag, which is still in session, the votes of the conservatives, the SPD and the Greens would suffice for that.
Once the next Bundestag is seated later in March, the Left party’s votes would also be needed, and while they favour more public spending, they oppose boosting defence outlays.
BUT ARE THE GREENS ON BOARD?
The Greens, despite being in favour of increased defence spending and loosening the debt brake, have signalled opposition to the plan.
They floated a counterproposal to exempt spending above 1.5% of GDP from the debt brake and define security more broadly to include intelligence, foreign aid and cybersecurity.
They would also like to see more of the new infrastructure spending firepower devolved to the states. They are part of the governing coalition in seven of Germany’s 16 states, meaning they would have a say in how it is spent.
The Greens and the would-be coalition parties are still in talks. One conservative legislator called the Greens’ proposals “in the range of the imaginable”.
The pro-business Free Democrats could also provide the necessary votes in the outgoing Bundestag, but they are the most sceptical of all the parties about increasing debt.
Winning the backing of other parties is not the only challenge: Merz spent the election campaign promising not to open the spending taps only to announce a tectonic shift in German fiscal policy days after winning.
Some legislators in his Christian Democrat (CDU) party and its Bavarian CSU allies may feel that is too sharp a U-turn, or that the SPD, the junior party in the planned coalition, has been given too much leeway. Whether enough would think that to torpedo the deal is unclear.
COULD LEGAL CHALLENGES SINK THE PACKAGE?
Both the far-right Alternative for Germany (AfD) and the Left party, which gained most in February’s national election, have launched urgent legal challenges against what they say is a manoeuvre to thwart the will of a parliament elected less than two weeks ago.
Germany’s powerful Constitutional Court has a history of overriding government decisions, including in core matters of budgetary policy.
The Court’s scepticism about special funds of the kind now planned paved the way for the fall of Chancellor Olaf Scholz’s government and the February early election that he lost.
Judges may also feel that squeezing the legislation into the period before the new Bundestag is seated is democratically questionable – as some lawmakers and legal experts also argue – or gives legislators too little time to debate the measures.
Marco Buschmann, FDP justice minister in Scholz’s collapsed government, has said he regards the proposed measures, even if passed by the outgoing parliament, as legally sound.
THE UPPER HOUSE IS THE FINAL HURDLE
The Bundesrat, Germany’s upper house, represents the governments of the 16 states that make up the federation.
The states, which for years have complained that they bear the brunt of Germany’s fiscal squeeze, have every incentive to pass the loosening package, since they will be among its major beneficiaries.
But the conservatives, SPD and Greens still need the backing of one more party for it to pass the Bundesrat: that could be the Left, its populist splinter the Sahra Wagenknecht Alliance (BSW), the FDP or the Bavarian Free Voters party.
The AfD is not an issue here, since it does not serve in a state government, and the Bundesrat represents governments, not voters.
The BSW, Kremlin-friendly in its rhetoric, would be unlikely to back measures to increase defence spending, and the Left is also opposed to defence spending. The FDP, pro-Ukraine and pro-military spending, dislikes excessive borrowing.
That means Bavaria’s Free Voters, sticklers for fiscal discipline from Germany’s wealthiest region, are likely to play a crucial role. They have declined to commit so far, but many analysts think they could be persuaded with the right offer.
($1 = 0.9207 euros)
(Reporting by Thomas Escritt; editing by Matthias Williams, Toby Chopra, Aidan Lewis)
