German lawmakers set timetable in race for borrowing bonanza

By Holger Hansen

BERLIN (Reuters) - German lawmakers will debate a 500-billion-euro infrastructure fund and sweeping changes to state borrowing rules to fund defence from March 13 in a race to get both measures passed in the outgoing parliament, two sources told Reuters on Thursday.

The Bundestag lower house will vote on the measures on March 18 ahead of the formation of a new parliament on March 25, where both moves could get blocked by an enlarged contingent of far-right and radical-left lawmakers, the sources added.

The conservatives, led by Germany's likely next chancellor, Friedrich Merz, and the Social Democrats, in talks to form a coalition, agreed this week to hike borrowing to spur growth in Europe's largest but ailing economy and overhaul the military.

The moves are a tectonic spending shift that jolted the markets in a country more known for its frugality and mark a rollback of rules imposed after the 2008 global financial crisis that many see as an outdated fiscal straitjacket.

The about-turn is a consequence of the turmoil caused by the return of Donald Trump as U.S. president, 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.

"At the request of one-third of the members of parliament, special sessions were requested on March 13 and March 18," one of the sources told Reuters.

THREAT OF LEGAL ACTION

But Merz and the SPD will need to rely on the backing of the smaller Greens party, who have yet to commit their support and questioned why more spending was not also geared towards climate-friendly measures.

The pro-business FDP, which has lawmakers in the outgoing parliament but not in the new one, will support a boost to defence spending but not the 500-billion-euro ($539 billion) infrastructure fund.

The far-right Alternative for Germany (AfD) has joined the radical Left party in threatening legal action. Together, the two parties would have enough votes to block the reforms once the new legislators are seated after performing strongly in last month's election.

Investors and some economists have long urged Germany to reform the "debt brake" to free up investment and support an economy that has contracted for the past two years.

Merz and the SPD want 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.

Many businesses have welcomed the plans, but on Thursday, German banks joined those voices saying the reforms needed to be accompanied by overhauls to cut red tape.

($1 = 0.9270 euros)

(Reporting by Holger Hansen and Alexander Ratz; Writing by Ludwig Burger, Friederike Heine, Matthias Williams; Editing by Madeline Chambers, Miranda Murray and Bernadette Baum)