Germany's Greens may torpedo Merz's spending bonanza but hint at deal

By Holger Hansen and Andreas Rinke

BERLIN (Reuters) -Germany's Greens vowed to block plans by likely next chancellor Friedrich Merz for a massive increase in state borrowing but left room for compromise on Monday on measures to revamp the military and revive growth in Europe's biggest economy.

The Greens' refusal to back sweeping reforms to debt rules and a special 500 billion euro ($540 billion) infrastructure fund could derail a spending bonanza that had excited markets last week. 

However, the party will put forward its own proposals and hold talks with Merz's conservatives and his potential coalition partners, the Social Democrats (SPD), later on Monday.

At stake is Germany's ability to unshackle borrowing limits to spur growth and support struggling industries after two years of economic contraction.

Merz has also stressed the urgency to increase defence spending. After winning elections last month, he said it was "five minutes to midnight" for Europe, warning that a hostile Russia and an unreliable U.S. could leave Europe exposed. 

But Merz and the SPD under leader Lars Klingbeil need support from the Greens to pass the measures in the outgoing parliament. 

"We will not allow ourselves to be blackmailed, nor will we allow Friedrich Merz and Lars Klingbeil to abuse a difficult European security situation," said Greens party co-leader Franziska Brantner. "This is something that serves neither the country nor our interests in Europe."

Another co-leader Katharina Droege said the Greens would urge its lawmakers not to vote for Merz's proposals, saying they would only back measures that included genuine support for climate policies and the economy.

Some voices in Merz's camp suggested the Greens could be playing hardball to extract concessions, though Klingbeil said the SPD was taking their concerns very seriously.

Merz wants to push through his plans in the outgoing parliament because in the new Bundestag that begins on March 25, they get even harder to pass, with an enlarged contingent of far-right and radical left lawmakers threatening to block them. 

The far-right Alternative for Germany (AfD) on Monday made good on those threats, launching a legal challenge at the constitutional court to block lawmakers from debating Merz's proposals. It also filed a complaint against the measures, which it has previously characterised as an "orgy of debt".

The court spokesperson said the challenges were being processed but could not give a date for a decision.

GREEN ANGER

Investors and some economists have long urged Germany to reform its constitutionally enshrined state borrowing limits - known as the "debt brake" - to free up investment.

The reform would mark a rollback of borrowing rules imposed after the 2008 global financial crisis that many see as an outdated fiscal straitjacket.

Merz wants to amend the constitution so defence expenditure above 1% of economic output is exempted from debt brake rules, and for a commission separately to develop proposals for broader debt brake reforms to boost investments permanently.

But the Greens want a complete reform of the debt brake straightaway. They also want more measures for climate protection and 200 billion of the 500 billion infrastructure fund earmarked for spending at state level, up from the planned 100 billion.

The financial policy spokesperson for the Greens told Reuters that Merz's plans did too little to tackle issues such as affordable housing or wealth creation for the poorest.

Merz's conservatives and the SPD have agreed to push income and corporate tax reforms, but Greens spokesperson Katharina Beck suggested a wealth tax instead for example.

"Investing in Germany's infrastructure on a large scale is absolutely necessary, as we Greens have been proposing for years, but cross-subsidizing tax gifts is not."

($1 = 0.9252 euros)

(Reporting by Holger Hansen, Andreas Rinke, Miranda Murray, Rachel More, Thomas Escritt, Ursula Knapp; Writing by Matthias Williams, Editing by Miranda Murray, William Maclean and Christina Fincher)