Germany’s Bundesbank has warned chancellor presumptive Friedrich Merz not to lose his head on borrowing after the Green Party agreed to back his €1 trillion investment plan on Friday.
After holding out for days, Greens secured agreement to earmark one fifth of the planned €500 billion investment programme for climate protection measures, with the rest to boost German infrastructure.
In exchange, in a Bundestag vote next Tuesday the Greens will also back far-reaching defence plans worth at least €500 billion, with additional spending exempt from the so-called debt brake when it exceeds one per cent of GDP.
Mr Merz recalled the outgoing Bundestag to approve the emergency measures after securing the necessary two thirds super majority with votes from his own Christian Democratic Union (CDU), the centre-left Social Democratic Party (SPD) and – after days of tough talks – the Green Party.
Announcing the breakthrough on Friday, Mr Merz said: “Germany is back.”
“It is a clear message to our partners and friends but also to our opponents and to the enemies of our freedom,” he said, “that we are capable of defence and we are now fully prepared to defend ourselves.”
The agreement ends years of arguments over the benefits and risks of borrowing and the so-called debt brake, which limits Germany’s structural deficit to 0.35 per cent of gross domestic product (GDP). After defending the debt brake and dismissing borrowing ahead of last month’s election, Mr Merz made a dramatic post-election U-turn in response to growing uncertainty over US support for its European North Atlantic Treaty Organisation (Nato) allies.
SPD co-leader Lars Klingbeil, currently in coalition talks with the CDU, welcomed “the largest infrastructure programme in Germany since time immemorial”.
Green parliamentary group leader Katharina Dröge said her party’s hard line meant more money “will be steered in the right direction”.
As well as massive climate spending, the Greens secured agreement that the infrastructure fund can only be used to finance new projects and not existing projects or recent campaign promises.
In addition, the CDU agreed to a wider definition of defence spending to include spending on civil defence and civil protection, intelligence services and support for states attacked in violation of international law, such as Ukraine.
The prospect of large-scale German borrowing – after years of restraint – has had an immediate effect on bond markets, with the German cost of borrowing rising to its highest level since 1990s.
That prompted an intervention from a concerned Bundesbank president Joachim Nagel warning the incoming coalition to “review priorities” for potential cuts and efficiencies in its next federal budget.
“Large-volume special funds and exemptions from the debt brake give some people the deceptive impression that there are no financing bottlenecks,” he said in a speech in Berlin.
While the €500 billion for infrastructure and climate protection spending will be borrowed outside the balance sheet, he noted that the debt brake would still limit regular budgetary spending.
And, after the 10-year infrastructure spending spree ended, he noted that Germany would have “more debt, which also means rising interest burdens and less budgetary leeway in the future”.
