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Friedrich Merz’s debt-funded investment package is still facing unknowns, that could sink the legislation and doom his chancellorship.
Analysis Based on factual reporting, although it Incorporates the expertise of the author/producer and may offer interpretations and conclusions.
[Michael Kappeler/picture alliance via Getty Images]
BERLIN – The chancellorship of Friedrich Merz is facing its first crucial test even before it has officially started.
On Tuesday morning, at 10 am, the lawmakers of the outgoing Bundestag will come together for what is likely going to be their last session.
Their task is to greenlight a historic debt-funded investment package, that could run up to €1 trillion and is being rushed through the old parliament in order to circumvent the unfavourable majorities of the newly elected parliament, which convenes next week.
That would give Germany’s election winner the fiscal headroom he needs to tackle the country’s deep-seated sclerosis in all areas, from defence to the economy.
On paper, Merz has the necessary two-thirds majority, after his Christian Democrats struck an eleventh-hour agreement with their designated coalition partner, the Social Democrats (SPD), as well as the Greens.
It is not yet a done deal, however: Merz and his allies are still facing unknowns, that could sink the legislation and doom his likely chancellorship from the start, even if the probability appears small.
What is the final compromise?
The original deal was agreed by the centre-right bloc and the SPD to unshackle their future coalition from the constraints of Germany’s strict constitutional debt rules, based mainly on two pillars.
- The first pillar was the exemption of defence spending worth more than 1% of GDP from the debt brake, a constitutional clause that limits Germany’s structural deficit to 0.35% of GDP. This effectively removes the limit for future expenditures from that category.
- The second pillar is an extra-budgetary special fund, worth €500 billion, to be invested into Germany’s ageing infrastructure.
Each proposal requires a two-thirds majority to adapt Germany’s constitution, so Merz and the SPD had to bring the Greens on board with a number of concessions, including the following:
- The definition of ‘defence spending’ will also exempt Ukraine aid, cybersecurity, civil defence and intelligence services from the debt brake.
- €100 billion of the infrastructure fund will go to an existing special fund, that is supposed to promote Germany’s net-zero targets.
- The fund cannot be used to cross-finance existing projects, which is supposed to prevent the use of the new fiscal headrooms for pork-barrel projects.
Friedrich Merz wants to end Germany’s deadlock on EU policy, but his solution may not be to everyone’s liking.
What happens if it doesn’t pass?
It is hard to imagine how the Christian Democrats and the SPD could agree on a government agenda that addresses the many pressing needs haunting the country, without the additional fiscal headroom.
This includes an economy in recession, strangled by industrial weakness and creaking infrastructure. Germany will also struggle to rearm, amid uncertainty over America’s future security engagement in Europe and a rising threat from Russia.
At best, that would delay coalition-building and restrain the future government; at worst, it could lead to snap elections.
The coalition could try to pass a broader reform of the debt brake with the newly elected parliament. But that will be much harder as the socialist Left and the far-right Alternative for Germany (AfD) hold a blocking minority against constitutional changes. The Left opposes additional defence spending, while the AfD is unlikely to cooperate with establishment parties.
What are the grievances?
The Christian Democrats are notoriously frugal. The amount of new debt makes some lawmakers uncomfortable, as does the fact that ambitious net-zero targets are going to be namechecked in Germany’s constitution if the new special fund is added to it.
Some SPD and Green lawmakers resent Merz as a staunch conservative, in general, and specifically for his harsh anti-left and anti-Green election campaign, which also included a joint vote of the centre-right with the AfD.
Will it pass?
The Christian Democrats, the SPD, and the Greens have 520 votes between them – 31 more votes than required for a two-thirds majority.
However, there will be rebels and absentees, even if Merz expected “fewer than a handful” among the centre-right’s ranks. One Green MP has publicly declared that she will vote against the package. On Monday afternoon, the SPD expected one absentee and one rebel.
The party’s power over their lawmakers is weakened, as some MPs are not going to return to their parliamentary group in the new parliament.
What comes after the vote?
If the package passes, there will be one more hurdle: changes to the constitution require an additional confirmation vote in the parliament’s federal state chamber, the Bundesrat, slated for Friday.
The chamber’s 69 delegates are picked by Germany’s regional governments, 46 of whom will need to vote in favour for the package to pass.
Regional states can only vote in favour if there is internal agreement among the respective coalition governments, however. The state governments formed exclusively by any of CDU, SPD and Greens only have 41 votes.
Yet, on Tuesday, the Bavarian government, which includes Merz’s allies, the Christian Social Union (CSU), and the liberal-conservative Free Voters, announced it would vote in favour. This would bring support to 47 votes.
Can the courts stop the legislation?
Germany’s Constitutional Court has rejected several emergency appeals against Merz’s approach, including by lawmakers from the Left, the AfD, and the liberal Free Democrats (FDP).
Some had argued that it would be unconstitutional for the old parliament to pass such momentous legislation when a new parliament has already been elected. Others contended that the consultation period was too short for MPs to make an informed decision.
The court pointed out that the old parliament remains in session and capable of making decisoins until a new parliament convenes, up to 30 days after the election. It also argued that while consultation periods may have been too short, passing the new legislation would be impossible in the new parliament, which justified the hurry.
The prospects for future legal appeals are not looking promising.
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