Let us know about free updates
Just sign up for German politics Myft Digest – Delivered directly to your inbox.
German election winner Friedrich Merz said he was trying to boost defence spending in Europe's largest country after political parties opposed to Ukraine's armed forces had enough seats to prevent the relaxation of strict restrictions on public borrowing. We face serious hurdles.
Meltz is to reform the “debt brake” to reform Germany's “debt brake” even if his Christian Democrats (CDU) officially maintain their commitment to rules up to Sunday's stage. It has shown that it will reform European-wide drives to finance European-wide drives. Vote.
However, Germany (AFD)'s far-right alternative and left Die Linke have won more than 210 seats needed for the “minority block” of the German parliament.
It gives them the power to prevent the German debt brake from being corrected. This is a rule engraved in the Constitution in 2009 to limit government borrowing and maintain the structural deficit at 0.35% of GDP.
The same terms will create a special off-balance sheet fund, including a pot of 100 billion euros announced by Prime Minister Olaf Scholz in 2022, funding German overhauls after President Vladimir Putin's full-scale invasion of Ukraine. Masu.
Holger Schmieding, chief economist at Berenberg Bank, warned that Sunday's outcome could cause serious headaches for Merz. “When it is important to raise military and Ukraine spending and ease the tax burden on workers and businesses, Germany may have difficulty finding financial space to do so,” he said.
“It could lead Germany to deep trouble with its NATO partners because it failed to strengthen military spending. By angering US President Donald Trump, it would also raise the risk of the US EU trade war.” Schmeading added.
“We've seen a lot of effort and we've seen analyst Jan Techau, Germany and Europe's defenses at Consultancy Eurasia Group,” said: . . That's a big problem. ”
Economists warn that without changing the debt brakes and creating special unbudget funds, it would be impossible to fund the largest economies of the eurozone to fund the eurozone's urgently needed additional investments would be impossible. I'm doing it. This includes money for the collapsed transport and communications infrastructure and a much higher defence budget in the wake of the Ukrainian invasion.
The scale of the challenge was exacerbated by Trump's return to the White House, the initiation of direct peace talks with Russia and his threat to elicit US security guarantees from Europe. .
Meltz says he believes he can find funds to fund investments by significantly reducing welfare payments and stimulating economic growth, but many analysts say We do not believe that such measures are sufficient.
If Meltz decides to reform the debt brake — if both support reforms, perhaps as part of an agreement with Scholz's Social Democrats (SPD) and the Greens, the results on Sunday would be that he would be It means you will be forced to navigate navigating tropics.
The AFD secured a historic second-place finish on Sunday with almost 21% of the vote, supporting higher defensive spending, but is vehemently opposed Ukrainian armament and opposed changes in the debt brake . Mertz also ruled out any form of direct cooperation with the far-right party.
Die Linke, which ended at almost 9%, supports debt brake reforms, but is stubbornly opposed to military support for Ukraine and increased spending on the German army.
Jens Südekum, a professor of international economics at Heinrich Heine University in Dusseldorf and advocate for debt brake reform, described the situation as “hard but not impossible.”
He will negotiate a deal with Die Linke, possibly by establishing a special, non-budget fund for private infrastructure and funding defenses using savings of around 500 billion euros from the regular budget. He said that it might be possible.
“The problem is they ask for a price,” he said of Die Linke. Merz could also face strong opposition to dealing with left-wing Dai Linke from his party, he said.
Some analysts, including Schmieding from Belenberg, have argued that Merz could pause the debt brake by declaring a national emergency, perhaps if the situation in Ukraine gets seriously worse.
However, such a move would only allow for a limited increase in spending over the set period. There is also the risk of being attacked by the German Constitutional Court. This blew a 6 billion euro hole in the federal budget after attempting to pay for green transitions in 2023 using pandemic-era emergency funds.
“In a simpler constellations, the CDU, Social Democrats and Green would have a very majority and could have implemented the fiscal policy that Germany needed,” Südekum said. “Now you need tweaks, twists and workarounds.”
