(Bloomberg) -- With Europe experiencing its most devastating war since 1945 and President Donald Trump ripping up the transatlantic alliance, Germany is preparing to abandon decades of caution and step into the breach.
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Plans announced by election-winner Friedrich Merz for hundreds of billions of euros in infrastructure spending and the buildup of the kind of German military muscle not seen since the Cold War have buoyed markets across Europe and piled expectations on his chancellorship before it’s even begun.
Whether the incoming German leader’s proposals stand a chance of becoming reality is about to become clearer on Thursday, when the Bundestag reconvenes in a special session to debate the required legislation. It’s the first time this century that lawmakers from an outgoing German parliament have been recalled in what will certainly be a testy debate. There’s a lot resting on the outcome.
The increasingly divergent strategic priorities of the US “leaves Europe more exposed to geopolitical threats than at any time since the end of the Cold War,” said David McAllister, a German politician from Merz’s party who heads the European Parliament’s foreign affairs committee. “That’s why we need this response and we need this response urgently.”
Merz, whose conservative CDU/CSU bloc won Germany’s Feb. 23 election, was quick to recognize the US pivot toward Russian leader Vladimir Putin and ripped up his campaign promise to limit spending, and instead essentially pledged unlimited new investment in security and defense as well as a debt-financed €500 billion ($545 billion) infrastructure fund.
The bold move has been cheered by investors, yet there is no guarantee of success. And while Thursday’s debate will set the tone, the crunch Bundestag vote takes place on Tuesday.
In his move to overturn Germany’s constitutional debt limits for defense, Merz has vowed to do “whatever it takes” — an expression the 69-year-old pointedly used in English. And make no mistake, it is historic for Germany and all Europe, in geopolitical, economic and financial terms.
One indication is how it played out in bond markets last week. Bund yields surged the most since the lead-up to reunification of East and West Germany in 1990, as investors adjusted to the prospect of more debt. The rosier outlook for the national economy and that of the 27-nation European Union by extension sent the euro surging to its best week since 2009 — when Russia was still a member of the Group of Eight.
With Trump talking down the US economy, investors have turned to European stocks, and Merz — a former chairman of BlackRock’s German operations — has managed to capitalize on the initial signs of the end of US exceptionalism.
Rheinmetall AG — Germany’s largest defense contractor, which makes the Leopard 2 main battle tank with privately held KNDS Deutschland — has gained around 90% so far this year. It’s now valued on a par with luxury goods giant LVMH.
An index measuring sentiment among managers of DAX companies surged in March to the highest level in three years. Shares in French and Italian defense companies Thales SA and Leonardo SpA have also soared.
Merz’s spending plans on infrastructure and defense address two of Germany’s fundamental ills — repairing the damage of years of austerity and ensuring security — and “may well be a game changer for global markets,” said Benoit Anne, a managing director at MFS Investment Management. “Global investors are now having major Europe FOMO,” or fear of missing out, he said.
All that optimism only underscores how much of a gamble Merz is taking. Not yet in office, his political fate is subject to Germany’s increasingly fragmented party politics. The fast-track legislative process was triggered by the mainstream’s loss of support at the expense of the far-right Alternative for Germany, or AfD, and the anti-capitalist Left. Both fringe parties gained seats in the new parliament at the expense of the Greens, the Social Democrats and the pro-business Free Democrats, which dropped out of the Bundestag.
Merz is pressed for time and said the security situation demands a coalition deal with the Social Democrats by Easter. But a revival of the so-called Grand Coalition isn’t a guarantee for stable government.
Changing the constitution requires a two-thirds majority in the lower house, which means engaging meaningfully across the Bundestag. That’s not Merz’s strength and it showed this week with the Greens balking at his proposals and seeking to extract concessions.
From his conservatives allies, he also faces charges of betraying his party’s strict budget policy — something he campaigned on — for the sake of a coalition deal. And some are beginning to have doubts.
One CDU lawmaker pointed out that Merz’s team has no experience with such negotiations and that outgoing Chancellor Olaf Scholz’s Social Democrats were far more adept. The implied criticism is that Merz has never served in government — neither at the state nor the federal level.
And then there’s his persistently low approval ratings. Just 38% of respondents to a Forsa poll for RTL/ntv’s Trendbarometer said they thought Merz would make a good chancellor; 52% thought otherwise, according to the results released March 11.
If Merz can pull it off, he’ll be hailed as the next Helmut Kohl, the chancellor who oversaw German reunification. But if he fails, he risks collapsing the political center. That would open a path for the Russia-friendly AfD to eventually govern the world’s No. 3 economy, leaving Europe more vulnerable and adrift than before.
“Germany’s showdown on historic fiscal stimulus is approaching,” said Carsten Brzeski, the global head of macro research at ING and a longtime watcher of German politics. “The final vote will be an all-or-nothing decision.”
Getting the financing, though, would just be the first step, and there are questions over whether Merz has a program to address Germany’s woes at their roots.
Europe’s largest economy is in urgent need of repair. Its outsized manufacturing sector needs particular attention: Industrial output is almost 15% below the late-2017 peak, stoking unemployment fears as companies consider shuttering their plants or taking production elsewhere. That extends to once-celebrated carmakers like Volkswagen AG that are suffering from slumping sales, increased competition from China and now face Trump’s tariffs.
The massive spending plan is “exactly right, given the geopolitical situation we’re in,” VW’s Chief Executive Officer Oliver Blume said this week.
The problems are manifold, from excessive bureaucracy, high energy costs and worker shortages. A massive fiscal spending boom — along with much needed-reforms — might change Germany’s fortunes by convincing companies to invest and consumers to spend. At least in the short term, the expectations are positive, with economists lifting their growth outlooks significantly for 2026 and 2027.
“If the proposal gets implemented, there is little doubt that this has the potential to revive Germany’s ailing economy,” said Simona Delle Chiaie and Jamie Rush of Bloomberg Economics. The plan “may boost Germany’s growth in the near to medium term and have a positive effect elsewhere in the bloc.”
The public agrees about the precariousness of the moment. The Trendbarometer survey found 50% thought that Putin would attack a NATO member if Russian forces prevailed in Ukraine and with no help coming from America. A remarkable 82% of respondents said they no longer see the US as a dependable ally.
It’s a dynamic seen on the streets of the former American sector in southwest Berlin, where US Army barracks have been replaced by homes for German families. It’s here, in July 1994, that President Bill Clinton delivered a speech at McNair Barracks marking the withdrawal of US forces after half a century serving on “freedom’s frontier.”
With the fall of the Berlin Wall and German reunification, the Cold War with the Soviet Union was over — mission accomplished, in Clinton’s words. “The lessons we have learned for 50 years tell us that we must never let the forces of tyranny rule again,” he said.
The vestiges of that close relationship is visible today is the “Amerika” playground on Harry-S-Truman-Allee. On the Fourth of July Platz, where Clinton gave his speech, would-be drivers practice on the paved expanse of the former parade grounds. Beyond place names, there are few outward signs of the area’s former significance as a Cold War “island of hope,” in Clinton’s words.
Instead, there is evidence of growing uncertainty and new antipathy toward the former occupying power.
“We used to look up to America, but now we’re going to have difficulties,” said Rick Schumacher, a 33-year-old who runs a garden center across from the McNair Barracks. “I don’t think what Trump is doing in foreign policy is good for us. We’ll have to look elsewhere for support.”
Trump’s ambivalence toward NATO has already brought the UK closer to Europe. Now, with US support kicked out from under Germany, it’s removing the remaining reservations to Berlin shouldering a more prominent geopolitical and security role to match its long-standing economic clout.
For McAllister, the shift hits close to home. The son of a British army officer, who spent his early childhood in West Berlin and went on to serve in the Bundeswehr, says Germans had long regarded the transatlantic alliance as “an unshakable pillar of stability.”
With it now under severe strain, all need to meet “this historic challenge,” he said
--With assistance from Jana Randow, Arne Delfs and Greg Ritchie.
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