A 3 a.m. Showdown Saved Merz’s Game-Changing Plan for Germany

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(Bloomberg) — In the early hours of Friday, Germany’s Greens were given a choice: Would they veto a game-changing spending plan over grievances with chancellor-in-waiting Friedrich Merz, or back the radical shift they themselves had been demanding for months?

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They were seven hours into talks at that point, following days of intense negotiations, and Foreign Minister Annalena Baerbock, a senior party figure, was in regular touch on the phone from Canada. With concessions from Merz’s conservative bloc such as extra climate protection funding, the Greens were in. 

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The decision to unleash the power of the federal balance sheet to transform Germany’s military and revamp its infrastructure is a watershed moment. It calls time on an era of budget restraint that’s hobbled the economy for years and could kickstart broader European resurgence.

But the path to this victory has been strewn with mistakes that highlight the 69-year-old’s personal flaws and raise questions about how Merz will manage once he seals the coalition deal he needs to take office. Before then, he still has to negotiate a formal vote in parliament on Tuesday to lock in his fiscal revolution. 

This story is based on conversations with people within the main political parties and close to Merz and other senior politicians. They requested anonymity discussing internal matters.

Rapid Reaction

Merz was set up to become chancellor when his conservative CDU/CSU bloc won last month’s elections. But coalition talks in Berlin take months. And Donald Trump’s tariff offensive and the US retreat from European security mean that Germany didn’t have the time to wait. 

Merz’s response was nothing less than seismic.

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In lightning negotiations with his prospective coalition partners, the Social Democrats, he agreed on a 500 billion ($543 billion) infrastructure fund and an escape clause that takes defense spending outside of Germany’s tight constitutional restrictions on borrowing. The aim is to jumpstart the economy through more investment and get Europe ready to counter Russian threats and fill the gap left by the US.

The market reaction was dramatic, with a comprehensive repricing across the European financial system. German borrowing costs jumped, while the euro and German stocks rose. 

Big Spender

It was never going to be easy for Merz to upend years of German caution about money and get it to spend big.

There was a party on March 4 when the CDU/CSU and the SPD announced their breakthrough on the finance packages. Staff had dressed as pirates, kings and clowns to celebrate Germany’s Carnival, a traditional end-of-winter festival. Many had painted faces, and there was no shortage of beer.

Merz was in celebratory mood too as he traveled to Brussels on March 6 and was garlanded by European leaders, before returning to work on coalition talks. 

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But he’d overlooked a crucial detail. 

While it’s the Social Democrats who are in talks to govern alongside Merz’s bloc for the next four years, he also needs the Greens for the two-thirds majority required to push through a constitutional reform. And at that point, he hadn’t locked in their support. 

An episode the following Saturday illustrates his apparent inability to communicate with people and parties in a way which might convince them to work with him. He called Green caucus co-leader Britta Hasselmann to tell her about the coalition talks and that he would need their votes in parliament for his packages.

Hasselmann, a 63-year-old Green veteran, was hiking in the Teutoburger forest in western Germany, posting pictures of flowers on social media. Merz got her voicemail and left a clumsy message. 

Hasselmann didn’t need to worry, Merz told her, he’d add the word “climate” somewhere to the legislation for the infrastructure fund so that her lawmakers would be happy. 

The condescending tone so enraged Hasselmann, a party moderate, that she didn’t even bother to relay the message to her more hardline co-leader.

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The following Monday they called a press conference to announce that they were planning to vote down Merz’s plan, rocking financial markets. 

“We need no lecturing from Mr. Merz,” Hasselmann said.

With his plans, perhaps even his chancellorship, in jeopardy, Merz pleaded with conservative lawmakers in a closed-door meeting to avoid provoking the Greens, a comment especially directed at CSU leader Markus Soeder who had been goading the environmentalist party ever since the election. 

“The Greens are gone. Goodbye, good journey, hope to never see you again,” Soeder said at a post-election meeting in Passau.

On Monday evening, Merz headed over to the Greens’ office in the Bundestag in an attempt to make peace. The meeting ended inconclusively after 80 minutes.

Within the conservative bloc, doubts were emerging about Merz’s negotiating strategy.

His inexperienced team was being exposed for its lack of preparation, some officials said. The Greens should have been brought in earlier and Merz should have spent his time courting them rather than taking a victory lap in Brussels, they added.

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And Merz’s patronizing tone continued to be an issue. 

Some of his prospective coalition partners in the Social Democrats watched in dismay as his hectoring tone continued to alienate the Greens.

At the same time, the intense back and forth reflected a tectonic shift that left many people across the political map unsure of exactly where they stand. 

Merz’s CDU/CSU have been the guardians of fiscal prudence for generations, the flagbearers of the so-called Black Zero policy which fixed balance budgets as a major economic objective. 

The debt brake was brought in by Merz’s conservative predecessor as chancellor, Angela Merkel, in 2009. It limits the amount of debt the government can raise and helped bring Germany’s debt pile down to 63% of GDP at the end of 2024. 

Now they are suggesting spending and borrowing on a scale that the more progressive Greens and Social Democrats would never have dared to propose.

Free Democrats leader Christian Duerr, due to be ejected from parliament when the new legislature comes in later this month, said the plan was “nothing but subsidies, nothing but new debt, without a real economic reform.”

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“That is left-wing economic policy and that can’t be the answer to the problems of Germany,” he said.

Fast Track

Adding to the controversy, Merz is trying to force the deal through before the new parliament is sworn in because he’ll struggle to reach that crucial two-thirds threshold later, after a surge in support for the far-right Alternative for Germany.

On Thursday, as politicians debated Merz’s plans, AfD leader Alice Weidel accused him of staging a “fiscal coup d’etat.” The AfD and The Left Party went to court to stop the fast track of the spending plans, but the bid was rejected on Friday.

As Merz fended off attacks from one part of the chamber, he continued to show little nous in how to win over others.

Right after making concessions to the Greens by announcing that a part of the money would be spent on climate protection, Merz blurted out, his hands folded in front of his chest: “What do you actually want in such a short time, more than what we have proposed to you over the last few days? What more do you want?”

Among the ranks of Greens, lawmakers shook their heads.

“I simply doubt the negotiating skills of some colleagues,” Hasselmann said, when it was her turn to speak. 

But late on Thursday, as Merz’s aides conceded to their key demands, the Greens finally came around. 

Funds earmarked for climate protection in the new fund will be doubled to €100 billion and a 2045 climate neutrality target will be put into the constitution.

Hasselmann insisted that her party’s lawmakers are fully on board, giving Merz a buffer of 31 when the package goes to parliament on Tuesday. That should be enough to ensure that any dissenters either among the conservative or the SPD ranks can’t defeat the plan. 

—With assistance from Petra Sorge.

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