Published by Global Banking and Finance Review
Posted on February 28, 2025
By Andreas Rinke and Matthias Williams
BERLIN (Reuters) - German election winner Friedrich Merz's conservatives and outgoing Chancellor Olaf Scholz's Social Democrats (SPD) held "open and constructive" talks towards forming a coalition, a joint statement said on Friday without giving details.
Parliamentary arithmetic means the centre-left SPD is the most likely ally to help Merz's conservatives form a new governing majority, but there is ill-feeling between the parties after a bruising election campaign.
Investors are watching what price the SPD will demand to join a government and whether parties will agree to a massive new defence fund and reforms to borrowing limits known as the "debt brake", either in the outgoing parliament or the next.
Economists and investors want a rapid easing of the debt brake to lift Europe's largest economy out of the doldrums and fund an overhaul of Germany's military, which has taken on urgency with Donald Trump back in the White House and dealing with Russia over the heads of Europe on ending the Ukraine war.
"The exploratory talks began in an open and constructive atmosphere," said a statement after several hours of talks at which the outgoing finance minister, Joerg Kukies, also gave an overview of the state's finances.
Discussions will continue next week.
The CEO of German chemicals group BASF, which is undergoing a massive restructuring programme to cut costs as Germany's economic falters, joined those calling for a quick agreement. Markus Kamieth told a press conference after the release of financial results that the two parties "need to get their act together" and focus negotiations on a limited number of the most important topics.
Critics - even some within his own party - worry that Merz's abrasive style could complicate the formation of a viable coalition and leave a vacuum at the heart of one of Europe's major powers at a critical juncture.
Some incoming SPD lawmakers openly oppose a government with Merz at the helm, the Bild newspaper reported on Friday.
The radical Left party performed strongly in Sunday's election and, together with the far-right Alternative for Germany (AfD), could block some legislation in the new parliament.
On Friday it threatened legal action at the Constitutional Court if parties tried to pass a new special defence fund worth hundreds of billions of euros in the outgoing parliament, as some lawmakers have called for.
A separate Constitutional Court ruling in 2023 about unspent pandemic funds blew a hole in the government's budget.
(Reporting by Andreas Rinke, Holger Hansen, Matthias Williams, Ludwig Burger; writing by Matthias Williams; Editing by Alex Richardson)
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