Merz Reaches Deal With Greens on German Spending Package

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Michael Nienaber and Kamil Kowalcze

Fri, Mar 14, 2025, 10:42 AM 4 min read

(Bloomberg) -- German conservative leader Friedrich Merz reached an agreement with the Green party on a debt-funded spending package for defense and infrastructure, overcoming a key hurdle ahead of a crunch vote in parliament next week.

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The deal is a breakthrough for Merz after the prospective chancellor’s Christian Democratic-led bloc and Social Democrats struggled this week to secure Green support, which is needed to win the required two-thirds majority to amend constitutional debt restrictions. The Greens rejected the initial package and demanded a greater commitment to climate protection.

“Germany is back,” Merz, who aims to succeed Chancellor Olaf Scholz in the coming weeks, told reporters in Berlin on Friday after meeting with lawmakers.

The incoming chancellor and the SPD are rushing to win backing in both houses of parliament for sweeping measures that would release defense spending from debt restrictions and set up a €500 billion ($542 billion) fund for infrastructure investment. The bill will now go to a vote in the lower house of parliament, or Bundestag, on Tuesday.

Passage would mark a game-changing turn away from Germany’s traditional budget discipline, spurred by geopolitical upheaval with Russia’s war in Ukraine and Donald Trump’s shift away from the transatlantic alliance. Merz, who had campaigned on maintaining the so-called debt brake, made an about-face last week, stunning supporters.

The agreement spelled out that the infrastructure funding would be earmarked for new projects and that €100 billion will be channeled to the government’s existing climate and transformation fund, meeting Green demands. It will also be extended to 12 years, instead of the planned 10.

The parameters for defense spending were also expanded to include aid to Ukraine and intelligence. Merz also said a €3 billion package for assistance to Kyiv will also likely be signed off next week.

Germany’s bonds slid to extend a recent drop on the agreement. The 10-year yield rose as much as eight basis points to 2.94%, just short of a recent peak reached Wednesday. The euro rose against the dollar, while the DAX index outperformed European peers.

Party Discipline

Now that they have an agreement, the parties will have to corral lawmakers. Merz and the SPD are rushing the package through parliament before the new Bundestag convenes on March 25.

Constitutional changes in the newly formed assembly face a higher threshold, since a surge in support for the far-right Alternative for Germany and anti-capitalist Left means that they hold an effective block on a two-thirds majority.

In the current parliament the CDU/CSU bloc, SPD and Greens jointly control 520 seats — 31 more than the 489 needed for a supermajority. That leaves little leeway, particularly amid speculation that hundreds of lawmakers who lost their seats may not be as disciplined in casting their votes.

Britta Hasselmann, the co-leader of the Greens’ parliamentary caucus, said she had no doubts about party support for the agreement.

“I have no concerns at all about the Green caucus,” she told reporters after lawmakers met. “We could see just how much encouragement we got with respect to the current deal.”

After the Bundestag, the package will also have to win a two-thirds majority in the upper house, or Bundesrat — a likely scenario with the Greens’ support.

Even if Merz succeeds in passing the measure, the messy process will leave a mark and puts the likely chancellor under pressure to deliver on growth and reforms before his term officially even gets under way.

The agreement maintains that defense spending of more than 1% of gross domestic product won’t be subject to Germany’s so-called debt brake, meaning that spending beyond can be effectively limitless. The Greens had pushed to raise that threshold to 1.5%.

The stakes for the German economy are significant, according to calculations from the German Institute for Economic Research, or DIW. The infrastructure fund alone could boost growth by an average of more than 2% a year over the next decade — including a 1% boost for next year, it said.

“The coalition now has a great responsibility to handle the considerable financial leeway responsibly,” Moritz Schularick, president of the Kiel Institute for the World Economy, said in a statement. Using the money to bolster high-tech research and development “could provide considerable growth impetus for the ailing German economy.”

The conservatives and the SPD, which are cobbling together a new governing coalition after last month’s election, spent the week courting the Greens, who pilloried the initial package as a grab bag for fulfilling campaign promises. Without the funding package, achieving an agreement between the two centrist rivals would be difficult.

Lars Klingbeil, co-leader of the Social Democrats, lauded the deal with the Greens as “liberating” for Germany.

“There are no losers,” he said. “There are a lot of winners and the overall winner of this will be the country.”

(Updates with SPD and economist comments, overview of deal.)

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