Chalk up a likely victory for Trump on German defense spending.
Germany Loosens Fiscal Chains to Transform European Defense
Trump demanded Germany increase its defense spending. That is the likely outcome but it’s not necessarily guaranteed because of a time window and politics.
Bloomberg reports Germany Loosens Fiscal Chains to Transform European Defense
Chancellor-in-waiting Friedrich Merz said on Tuesday night that Germany would amend the constitution to exempt defense and security outlays from limits on fiscal spending and do “whatever it takes” to defend the country. He said that with the backing of his likely coalition partners he is also planning a €500 billion ($528 billion) infrastructure fund to invest in priorities such as transportation, energy grids and housing over 10 years.
“Europe needs to strengthen defense,” said Merz, whose CDU/CSU alliance finished first in a federal election just over a week ago. “The necessary decisions, especially with regard to the federal budget, can no longer be postponed after the recent choices of the American government.”
The euro surged to $1.0644, the highest since Nov. 13, and is on course for its largest three-day gain since late 2022 as investors bet the increased spending by Germany and others will boost the European economy. Yields on 10-year bunds surged 23 basis points as trading began, the biggest intraday move since June 2022. The benchmark securities now yield 2.73%.
The EU responded to Trump’s aid halt by proposing €150 billion in loans to boost defense spending. After decades of underinvestment, European Commission President Ursula von der Leyen said that the EU also plans to activate a mechanism that would allow countries to use their national budgets to spend an additional €650 billion on defense over four years without triggering budgetary penalties.
Not a Done Deal
The German reaction was in response to Trump’s spat with Zelensky and shutdown of aid to Ukraine.
However, this is just a proposal. It takes two-thirds of the German parliament to agree. Moreover, the incoming government is highly unlikely to agree.
AfD and the far left have a blocking minority.
But there is a small window of opportunity to recall the outgoing parliament to get this done.
Race to Win Support
Reuters reports Germany’s Merz Races to Win Support for Major Financial Package.
After three years of attacking what he called the outgoing government’s profligacy from opposition, Germany’s likely next leader Friedrich Merz is now trying to use the narrow window before new legislators officially take up their seats to pass the massive borrowing package.
The about-turn is a consequence of the turmoil caused by the return of Donald Trumpto the White House, bringing with it a realisation that Europe can no longer rely on the United States to guarantee its security in the face of a hostile Russia.
Merz’s conservatives and the Social Democrats (SPD), who are in negotiations to form a coalition following the election, will put their proposals to the German parliament next week, with a vote possible on March 17.
But the Greens party, whose support is key to getting the reform through the outgoing parliament, refused to pledge support, questioning why climate-friendly policies had not been included.
The far-right Alternative for Germany (AfD) joined the radical Left party in threatening legal action. Together, the two parties would have enough votes to block the reform once the new legislators are seated.
Germany’s move also throws down the gauntlet to France, where President Emmanuel Macron wants to bolster defence spending but is struggling to tame an unruly budget deficit.
Merz said his CDU/CSU conservative bloc and the SPD would submit a motion to parliament next week to amend the constitution so defence expenditure above 1% of economic output is exempted from debt brake rules.
A commission of experts will separately develop a proposal for modernizing the debt brake to boost investments on a permanent basis.
According to a poll by INSA, 49% of Germans support loosening the debt brake while only 28% are against. But changing the debt rules and creating a special fund require a two-thirds majority in parliament.
Greens Say “Me To”
As is always the case, when one party demands more spending, everyone else does too.
I was aware of this proposal for a week but thought it might fail because (silly me, I believed Merz when he said he would not amend the constitution for massive spending).
The German Bazooka
The Guardian discusses ‘A Risky Bet’: Friedrich Merz Criticized Over Plan to Lift Germany’s Debt Rules.
Merz’s efforts to squeeze the plans through the existing parliament, where the conservatives and SPD currently have the necessary two-thirds majority together with the Greens – but which they will lose once the new parliament is in place at the end of March – have been described as a race against time.
He has been confronted with myriad accusations from opposition parties, everything from committing voter fraud to endangering the democratic process by rushing his plans through parliament.
The Greens, not part of negotiations for a new government but keen supporters of Ukraine as well as for a spending increase on Germany’s ailing infrastructure, have indicated their support. However, their joint parliamentary leader Britta Haßelmann accused Merz of breaking his promise to not take on more debt.
“You promised the citizens of this country that there would be no more debt,” she said, lamenting also Merz’s lack of commitment to fiscal reform. “From one day to the next you’ve broken this election promise.”
Die Linke, which has 64 seats in the new parliament, questioned the legality of the financial plans, and accused Merz of circumnavigating the distribution of seats in the new parliament. “We question whether the decision on several hundreds of billions of euros by an old parliament that has just been voted out is at all constitutional,” it said in a statement.
The pro-business FDP, which will have no seats in the new parliament, but whose opposition to the outgoing government’s wish to boost spending by taking on more debt led to the administration’s collapse last November, accused Merz of participating in a “debt orgy”. The party’s parliamentary group leader, Christian Dürr, criticised Merz for “already shying away from real reforms before he’s even chancellor”.
Broken Promises? Mercy!
“From one day to the next you’ve broken this election promise,” holler the Greens.
Mercy, how shocking! Well, this is easily fixed.
Q: Really? How So?
A: Please reflect on how “me too” works. Just toss them a bone.
What About France?
Unlike Germany, France and Italy are under EU debt and deficit proceedings.
That makes it harder.
To understand how France differs from Germany, please consider The Political Crisis in France Is About to Get Much Worse
The entire eurozone is in shambles, and Trump’s demands [on 5 percent defense spending and trade policy] will accelerate the crisis. One seriously must wonder if that is his real goal.
Me Too, US Style
Fiscal conservatives make deal after deal after deal with the progressives.
On March 1, I commented Republicans Cave In on Spending, as Expected, Now that Trump Agrees
Trump seeks a “Clean Continuing Resolution”. The spineless House cheers.
Continuing Resolution Flashbacks
November 11, 2023: No Surprise, House Speaker Johnson Proposes Same Plan as McCarthy
There are likely big surprises elsewhere, but there is no surprise in this corner regarding Johnson’s plans to keep the government running.
“It’s…100% clean. And I 100% oppose,” said Rep. Chip Roy (R., Texas) on social media.
December 19, 2024: House Rejects Trump-Supported Stopgap Funding Plan, 37 Republicans Say No
37 Republicans say no to Trump.
Yesterday, Speaker Mike Johnson agreed to pass a 1500+ page continuing resolution budget monstrosity.
The bill died after Elon Musk and president-elect Trump trashed it.
Johnson then slimmed the bill down to 116 pages. That bill had Trump’s support.
Not mine. But I don’t get a vote. Regardless, I was reasonably confident the revised bill would blow up, and it did.
Once Johnson stripped 1300 pages of Democrat goodies the bill was doomed in the Senate and I thought the House as well.
Sure enough, the vote was 234 against to 174 for. That is nowhere close to a majority even if you throw in 21 non-voting and 1 who voted present.
Trump Threatens to Take Down Chip Roy
Also on December 19, 2024, but ahead of the vote, I reported Trump Threatens to Take Down Chip Roy, One of the Only True Fiscal Conservatives
Massive Republican infighting between Trump and fiscal conservatives is underway.
Trump was annoyed because Chip Roy, a member of the Freedom Caucus blasted the Trump-approved 116-page bill.
Well now, Chip Roy is on board. Fancy that.
The Hard-Line Freedom Caucus
The allegedly hard-line Freedom Caucus led by Chip Roy is now OK with clean continuing resolutions.
I can guarantee the result in advance: Trump will propose budget-busting spending items that DOGE won’t come close to covering.
Republicans will dramatically increase the deficit and will use gimmicks and ridiculous assumptions to deny that fact.
But that’s OK now that Trump wants them.
Trump Waives the White Flag Already
To buy votes for tax cuts, Trump is waiving the white flag of surrender already. He supports reinstallation of state and local tax deductions that New York wants.
It won’t stop there.
Lord only knows what an iron dome defense shield will cost, but Trump asked for that last night when he addressed Congress.
The only way Democrats will go along with more defense spending is the never fail “me too” strategy.
If you seriously believe DOGE will do a damn thing about this, look in a mirror to see someone who is delusional.
Nobody can outdo the US “me too”
The best we can hope for is no deal at all. I give that about a 2 percent chance.
Meanwhile, we can thank Trump for getting Germany to wreck its finances too.
And thus Trump kicked off a refreshing round of Global MeTooIsmtm GMTItm even in hard sought after Germany.
That’s a Global MeTooIsmtm job well done.
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