Friedrich Merz, Germany's prospective chancellor, has initiated talks with Social Democrats to swiftly approve up to €200 billion for defense spending, according to reports from Bloomberg. Officials from Merz's Christian Democratic Union (CDU) and the Social Democratic Party (SPD) are exploring ways to circumvent Germany's strict government borrowing limits to free up resources for modernizing the country's military. Sources familiar with the discussions indicated plans could be expedited for voting on the package—potentially double the amount approved three years ago—before the new parliament is officially seated.
Merz has pledged to boost investment in the German armed forces to counter Russian aggression. His plans face challenges after far-right and left-wing parties secured blocking minorities within the future parliament. With less than two-thirds of seats available, traditional parties do not possess sufficient votes to amend constitutional borrowing limits. Nevertheless, they might navigate this issue by pushing necessary measures through before the new legislature officially starts on March 24.
The urgency for the election winner is underscored as the rest of the European Union reacts to former President Donald Trump's push for expedited resolution to the Ukraine conflict. Trump has already engaged with Russian President Vladimir Putin and is nearing a deal with Kyiv concerning natural resources, signaling his desire for European nations to take responsibility for ensuring Ukraine's future security.
Potential funding mechanisms under discussion include establishing a special fund for new military expenditures and aid for Ukraine, sources reported. Alternatives may involve extending the existing €100 billion fund or modifying the so-called "debt brake" to allow additional defense spending. Each of these options would require a two-thirds majority from parliament, which may be more challenging once the new legislature convenes.
German bonds experienced slight declines earlier this week amid speculation over additional issuance to fund these expenses. The yield on 10-year government bonds rose by one basis point to 2.49% before easing slightly. "Currently, there is blocking minorities on both the far left and far right," Merz stated, emphasizing the need for rapid decisions from the Bundestag. "If we should or must make decisions, it is something I will discuss with the parties still within the Bundestag," he added.
Merz is expected to engage with SPD leader Lars Klingbeil on Tuesday to discuss support for Ukraine and defense spending, with both leaders aiming to clarify several aspects in the coming days. Exploratory talks to form potential coalitions are scheduled to commence on March 6, following regional elections held on Sunday.
Chancellor Olaf Scholz, also from the SPD, has raised the possibility of convening parliament for an emergency session. He noted to reporters on Monday parallels with 1998 when Germany had to make decisions concerning the Yugoslavian war. "It is rare for parliament to meet outside of its schedule, but it would not be the first time," Scholz remarked.
This idea was publicly proposed by Vice Chancellor Robert Habeck, part of the Greens, and Foreign Minister Annalena Baerbock during a press conference. Habeck, who also serves as Minister for Economic Affairs, noted the decision now lies with Merz. "Approval of the budget adjustments before the new parliament starts will be challenging, but it should be feasible if Merz truly supports it," stated Holger Schmieding, chief economist at Berenberg.
Prior to the elections, the SPD and the Greens were open to supplementing the defense fund. Strengthening this fund would mitigate risks posed by the election outcomes, which have influenced both leftist Die Linke and right-wing AfD parties to possibly oppose constitutional amendments.
International pressures and negotiations are also influencing the discussions. French President Emmanuel Macron engaged with Donald Trump on Ukraine during Trump's visit to Washington, aiming to secure Europe's role in peace negotiations and reinforce the region's commitment to increasing defense expenditures. This same message is expected to be echoed by British Prime Minister Keir Starmer during his scheduled visit to Washington.
European Union leaders are set to meet on March 6 to discuss the next steps forward. Merz has indicated he aims to finalize coalition agreements with the SPD by Easter, whereas Trump has communicated to American officials his desire for a peace pact concerning Ukraine by the same timeframe.