(Bloomberg) — German conservative leader Friedrich Merz reached a tentative agreement with the Green party on a debt-funded spending package for defense and infrastructure, people familiar with the discussions said.
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The deal needs to be approved by party lawmakers, the people said on condition of anonymity as negotiations go on behind closed doors. Merz’s Christian Democratic-led bloc, the Social Democrats and the Greens have called meetings with their lawmakers for 1 p.m. local time.
Merz, who aims to succeed Chancellor Olaf Scholz in the coming weeks, said late Thursday that he’s “very optimistic” that the landmark debt-spending package will be approved after a parliamentary debate on Thursday laid bare a deep rift with the Greens.
Germany’s bonds slid to extend a recent drop on reports of an agreement Friday. The 10-year yield rose as much as eight basis points to 2.94%, just short of a recent peak reached Wednesday. It’s already surged more than 50 basis points since the start of March.
Merz’s Christian Democratic-led bloc and the SPD are rushing to secure a supermajority in parliament to approve sweeping constitutional amendments that would release defense spending from debt restrictions and set up a €500 billion ($542 billion) fund for infrastructure investment.
For that, the main parties — which are cobbling together a new coalition government after last month’s election — are courting the Greens, who have rejected the package as a grab bag for election favors.
The agreement on Friday 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, according to news organization RND. Handelsblatt reported earlier that an agreement had been reached.
Monika Schnitzer, who chairs the German Council of Economic Experts that advises the government, said the Green critique of the package was valid and that policymakers needed to ensure that the new fiscal leeway not be used as “presents to clients” — “a tax break here, a subsidy there.”
“The really crucial thing at this point is to make sure that the new investment will be additional to what investment we have been doing so far,” Schnitzer said in an interview on Bloomberg Television.
A debate in the lower house, or Bundestag, on Thursday showed that the environmental party had still been unmoved days before a final vote in the chamber on Tuesday.
Merz’s debate performance came under scrutiny after he initially lauded the Greens for their cooperation, only to brusquely insist the party should be satisfied with climate-related measures on offer. “What more do you want than what we have proposed to you?” Merz asked, prompting jeers from the party.
The prospective chancellor fumbled the speech and alienated the Greens at a critical moment in the negotiations, a senior SPD lawmaker said. A failure to get the financial package over the line would also remove the basis for coalition talks between Merz’s CDU/CSU bloc and the SPD, the lawmaker said, speaking on condition of anonymity as the delicate talks take place behind closed doors.
(Adds market reaction, background, comment from economic adviser from fourth paragraph.)
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