All About That Budget Hustle: The Lowdown on the Bundestag's Special Session for the Financial Package
- ⏱️ - 4 Min Read
Finance bill under debate in the extra session of the German Parliament (Bundestag) - Proposals have already been put forward by the Commission in this regard.
A massive financial package geared towards defense and infrastructure is set to set the stage for a brand new black-red coalition. However, it seems this joint project might hit a snag as the Union and SPD need the backing of the Greens or FDP, who haven't made up their minds yet. Let's dive into the deets.
What's on the agenda at this special session for the financial package?
The Union and SPD are aiming to tweak the Basic Law in several ways, affecting three primary areas: defense spending should only be subject to the debt brake up to 1% of GDP (around 44 billion euros), while anything above can be financed freely with loans. The federal states will also gain more wiggle room for their own debt, allowed to borrow up to 0.35% of GDP collectively in the future. Lastly, a special fund for infrastructure investments, exempt from the debt brake and filled with 500 billion euros in loans, is on the table.
But why, you ask?
It's all about bolstering two sectors that experts believe require a considerable catch-up investment. For NATO's two-percent target, Germany is estimated to require around 85-90 billion euros annually from 2028. The objective is to strengthen the Bundeswehr to deter potential threats and stand up to a fight, in addition to continuing support for Ukraine amidst Russia's aggression. Germany also has a substantial backlog in infrastructure investments, including highways, bridges, railways, energy networks, daycare centers, schools, and universities. Dishing out 500 billion euros over ten years could provide Germany a significant modernization boost and prevent tough funding decisions between infrastructure and necessary expenses such as social security. However, there's always the risk that unnecessary projects get funded and coalition disputes are resolved via financial indulgences.
Where's the money gonna come from, though?
By issuing bonds on the open market, the government obtains fresh money. Essentially, investors lend money to the state in exchange for interest payments. Although the loan eventually needs to be repaid, this can be pushed further down the road. Until then, the state pays the interest from its annual budgets. As of now, Germany boasts a top credit rating from the rating agencies, enabling the state to borrow money at very attractive interest rates. While the financial crisis of 2010 saw a debt ratio of 82% for Germany, it still managed to retain its AAA rating. Depending on how much faith the rating agencies place in the economic strength of the country, this could continue to hold true for this financial package as well.
And what about my mortgage, you wonder?
Immediately upon announcement, mortgage rates began to inch up—this is somewhat linked to the yield on German government bonds. Whether this trend will persist is uncertain, as mortgage rates fluctuate daily and are subject to noticeable variations.
So, what's the deal in Parliament?
Union and SPD can't make things happen alone, as constitional amendments require a two-thirds majority. With AfD and Die Linke potentially obstructing the reform, the old Bundestag needs to make decisions swiftly. However, the Greens' approval is far from guaranteed at the moment. A compromise with the Greens seems the most likely option.
What's on the Greens' wishlist?
The Greens fear that the package will fund extravagant election gifts like the mother's pension and commuter allowance, while progress for the country is negligible. They may agree to an exception to the debt brake for defense with some modifications. However, they'd prefer to manage the billions for infrastructure differently, ensuring the money actually goes towards additional projects, and not merely serving to free up budget funds for election-friendly initiatives.
Is a compromise in the works?
Not likely for the SPD. Infrastructure funding is crucial to them, and this proposed arrangement doesn't guarantee it. The success of the project hinges on the collaboration between Union and Left. If the package is split, the decision on the defense exception becomes precarious, and the SPD's support could waver, as many members from the current faction won't be in the next Bundestag.
Are we going to see a decision today?
Nope, the law must traverse multiple rounds in parliament. Following the first reading, there will likely be organizing meetings, budget committee hearings, and more before the decisive reading and vote takes place on March 18. Time is running short, as the new Bundestag convenes on March 25.
What influence does the Bundesrat have in this?
A constitutional amendment requires at least two-thirds of the Länder's votes besides the Bundestag's decision, and these votes are also unpredictable. Federal states with green participation in government (Baden-Württemberg, North Rhine-Westphalia, and Bremen) insist that the Länder receive more than the planned 100 billion from the infrastructure special fund. Federal states with Die Linke, FDP, or BSW in government may face difficulties reaching a consensus due to their partner parties' internal disagreements. The Free Voters in Bavaria, too, have left their approval open.
If the project flops, is Merz out as Chancellor?
At the very least, Union and SPD will have lost the foundation for their previous negotiations. Without the extra money, many projects will be poorly funded, or tough budget cuts will be necessary in other areas. Whether the SPD would still be willing to govern with the Union under these conditions is uncertain. Much would need to be renegotiated. In the event of cooperation with AfD and minority governments being ruled out, there seems to be no real alternative to a black-red coalition after the Bundestag election.
- The SPD and the Union aim to secure the approval of the Greens or FDP for the financial package, as a two-thirds majority is required in the Bundestag for constitutional amendments.
- The Greens appear uncertain about supporting the financial package, expressing concerns that it may fund extravagant election gifts, and instead prefer reallocating the infrastructure funds to ensure the money goes towards additional projects.
- If the SPD is unable to reach a compromise with the Greens, the success of the financial package becomes precarious, and the SPD's support could waver, potentially affecting the foundation for their negotiations, and potentially the future of the black-red coalition.
