Germany's Merz does not rule out EU defence borrowing

By Andrew Gray and Thomas Escritt

BRUSSELS (Reuters) - Friedrich Merz did not rule out common European Union borrowing for defence on Friday during his first trip to Brussels as German chancellor, but said it could only be for exceptional circumstances and that he was worried about rising global debt.

Fiscally prudent Germany, the EU's largest economy, has traditionally rejected common borrowing, with the exception of the COVID pandemic when it was used to fund recovery projects.

But increasing Russian hostility towards Europe in the wake of the invasion of Ukraine, and fears that the U.S. might not to come to the aid of NATO allies, have bolstered calls for Berlin to make another exception to bolster regional security.

Merz, who took office on Tuesday, told a joint news conference with European Commission President Ursula von der Leyen that he did not want to preempt conversations in his government and the EU over different financing options.

When asked about common debt, he repeated the German mantra that the guiding principle must remain that the EU should only take on debt in exceptional circumstances, without saying whether he thought the current situation qualified as such.

"We had the exceptional situation of the coronavirus pandemic, and now we face a new major challenge: the establishment - or re-establishment - of the European Union’s defence capability," Merz said.

"We are looking for ways to finance this."

Merz said on the eve of Germany's federal election that Europe needed to become independent from the United States when it came to security.

Before taking office, he pushed a historic fiscal package through parliament that would allow his government to drastically hike national defence spending, suggesting he would take a more assertive stance on defence than his predecessor.

Merz is also a conservative who has long advocated fiscal rectitude. He said on Friday he was "worried about the constantly rising national debt around the world - not just in Europe, but also, for example, in the United States".

"And I do wonder how long it will be possible not only to refinance the debt itself but also to finance the interest payments. We cannot keep taking on debt indefinitely," he added.

German debt is just above 60% of GDP - half of the level of the United States and two thirds the euro zone average.

(Reporting by Andrew Gray in Brussels, Thomas Escritt and Miranda Murray in Berlin; Writing by Sarah Marsh; Editing by Andrew Heavens)