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(Bloomberg) — Germany’s chancellor-in-waiting Friedrich Merz has opened talks with the Social Democrats to quickly approve as much as €200 billion ($210 billion) in special defense spending, according to a person familiar with those discussions.
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Officials from Merz’s Christian Democrats and the SPD are discussing ways to get around Germany’s tight restrictions on government borrowing to free up resources for the country’s dilapidated military, said people familiar with the matter, who asked not to be named discussing private conversations. They are considering pushing a vote on the new package, which would be double the amount of one approved three years ago, through the lame duck parliament, they said.
Merz has been promising to ramp up investment in the German military to counter Russian aggression but his plans have run into trouble after fringe parties secured a blocking minority in the next parliament. With less than two-thirds of the seats, the mainstream parties don’t have the votes to ease the constitutional limits on government borrowing. But they could get around that by pushing through a vote before the new legislature sits for the first time on March 24.
The winner of Sunday’s election is under pressure to move quickly on defense with the rest of the European Union scrambling to respond to Donald Trump’s determination to force a quick settlement to the war in Ukraine.
Trump has already spoken with Russia’s Vladimir Putin and is close to agreeing a deal with Kyiv on natural resources and his officials have said he wants European nations to take responsibility for guaranteeing Ukraine’s future security.
One idea under discussion in Germany would be to approve a special fund for the new military spending and Ukraine aid, the people said. Other options would be to expand the existing €100 billion fund or to adapt the so-called debt brake so it allows extra spending on defense. Any of those options would require a super majority of two-thirds of lawmakers and that will be far more difficult to secure once the next legislature sits.
German bonds underperformed interest-rate swaps amid the prospect of greater issuance to fund the spending. The gap between the 10-year yield and the equivalent swap rate on Tuesday reached the most negative level since at least 2007, according to data compiled by Bloomberg.
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