Crunch Time In The Bundestag

Tomorrow’s debate in the reconvened outgoing Bundestag – unless it is halted by the Constitutional Court – kicks off a constitutional amendment process that could, if successful, result in the largest fiscal expansion since German reunification (see here). However, the fiscal package is not yet a done deal, and below we provide an update of the latest events.

At the time of writing, no compromise has emerged yet that would secure a two-thirds majority among CDU/CSU, SPD, Greens, and FDP. However, despite this legislative process being unusually expedited, it is still early days. Since tomorrow’s reading marks only the beginning of the parliamentary process, it is not unusual for three competing legislative proposals to be submitted. These proposals concern the financing of defense spending going forward, with the debt-brake exemption proposed by the CDU/CSU and SPD modified by the Greens’ proposal and countered by the FDP’s proposal to simply expand the existing defense fund by €200bn. The debate over the infrastructure fund remains more general.

As political negotiations continue, we have seen more constructive comments from the Greens on Tuesday, with party co-head Brantner saying “of course we are ready to negotiate”. This is consistent with our base case that a compromise will be found before the second and third readings, culminating in a vote on March 18. The FDP’s willingness to support a larger defense fund also puts pressure on the Greens with regard to defense. At the same time, both Brantner and Econ Minister Habeck have indicated that they would prefer to park a new infrastructure fund for the next parliamentary term. While a separation of the two reforms is anathema to the SPD, the Conservatives have sounded more open-minded. The political noise and uncertainty is thus likely to continue over the coming days.

Below we summarize all the latest twists and turns courtesy of DB economists Marion Muehlberger and Robin Winkler.

What is the current state of play?

Last Tuesday, the prospective new coalition partners, the CDU/CSU and SPD, proposed a significant fiscal expansion. It would exempt defense spending over and above 1% of GDP from the debt brake, establish a EUR 500 bn off-budget fund for infrastructure investment, and raise the net borrowing cap for the German states from 0% to 0.35%. The prospective government plans to pass the proposed fiscal reform in the old Bundestag, i.e. before the new Bundestag constitutes itself on March 25. A first reading will be held tomorrow and the second and third readings are planned for March 18, resulting in a vote. In the old Bundestag the CDU/CSU and SPD would need the support of the Greens (or the FDP) to achieve the required two-thirds majority. Both parties have tabled their own proposals over the past few days (see Figure 1 for an overview).

The Greens appear not to be inclined to give the CDU/CSU and SPD an easy win. On Monday, they announced that they reject the CDU/CSU-SPD proposal in its current form and have decided to bring in an own draft law instead. It only includes defense spending, to be exempted over and above 1.5% of GDP from the debt brake, as the Greens view the 1% proposed by the CDU/CSU-SPD as unambitious. The infrastructure part is not included in their proposal as the Greens want to discuss a reform of the debt brake for infrastructure investments in the new Bundestag. The Greens have reservations about the proposed €500 bn off-budget funds for infrastructure as the proposal merely states that the funds must be used for “investments in infrastructure” without specifying that they must be additional investment. The Greens’ concern is that the next government might push current investment expenses into the new fund to fund other fiscal projects such as corporate tax cuts or energy subsidies. Moreover, the Greens take issue with the lack of emphasis on the green transition. Still, the greens have signalled they are open to negotiations.

On Tuesday, the FDP also tabled a proposal for topping up the existing off-budget defense fund by EUR 200 bn. That expands the scope of negotiation for the CDU/CSU and SPD, as they theoretically also hold a two-thirds majority in the old Bundestag with the Liberals. Eventually, a compromise proposal might be easier found with the Greens given larger overlap (see Figure 1).

What to expect from tomorrow’s debate in the Bundestag?

Tomorrow’s first reading is largely a debate about proposed legislation. The first reading of the draft constitutional changes is scheduled for 12.00 CET (see parliamentary schedule). There will be no decision on the draft law and it cannot be altered or rejected at this stage. The draft is referred to committees for deliberation (with the budget committee in the lead), where an intensive examination of the draft law takes place. The committee deliberations conclude with a report containing the results of the deliberations and a recommendation for a decision to the plenary.

Base case – fiscal compromise deal

The DB base case remains for the reforms to pass with a two-thirds majority over the course of next week, but it is unlikely to be a smooth passage, and political noise is expected to increase over the next few days. The Greens’ counter-proposal was most likely about increasing their leverage in negotiations over the next few days without overplaying their hand.

The discussions in the committees and the second reading provide the opportunity to make changes to the draft legislation before it is intended to be passed in a third reading, scheduled for March 18. The counter proposal by the FDP has slightly lowered the Greens’ leverage in negotiations. But their overall leverage is still considerable and thus a potential compromise could include several of the Greens’ key demands:

• On defence, the CDU/CSU-SPD could accommodate the ask of the Greens and agree to exempt defense spending above 1.5% of GDP from the debt brake.
• On infrastructure, the Greens will likely insist on a more precise definition of investments covered by the fund with an emphasis that they need to be additional and “future-oriented” (i.e. partially earmarked for the green transition). In addition, German states and municipalities could also get a higher share than the proposed €100 bn out of the €500 bn off-budget fund. Several Green state ministers asked for at least €200 bn. This could facilitate the reform being approved in the Bundesrat.

Overall, such a compromise proposal would not significantly alter the expected fiscal stimulus of 3-4% of GDP by 2027 at the latest that was calculated for the original CDU/CSU-SPD proposal. The Greens want to broaden the definition of defense expenditure (i.e. include also potential future aid for Ukraine) which would be exempted from the debt brake beyond 1.5% of GDP. This is why net/net the effect could be more spending exempted from the debt brake despite raising the exemption from 1% to 1.5%. But of course this depends on how much any future government would spend on these extra categories.

Tail risk – splitting the fiscal package into an (immediate) defense and a (later) infrastructure part

In a tail risk scenario the Greens, despite being offered concessions, might not support a potentially revamped CDU/CSU-SPD fiscal reform package. Instead, they might decide to only agree to passing debt brake reform for defense spending in the old Bundestag. The infrastructure part would then be deliberated in the new Bundestag and require the support of the Left. This would potentially change the composition of the infrastructure package and gear it more towards social housing.

What speaks to the Greens pursuing this route is that their left-wing MPs might prefer a more substantial change of the debt brake with the support of the Left. What speaks against this is that the CDU/CSU-SPD also have the option to go ahead with a €200 bn off-budget fund for defense as proposed by the FDP. In addition, the majority of the population would regard this as blocking necessary urgent measures as there seems to be broad agreement with the need to spend more on defense and infrastructure. 

Moreover, the splitting of the proposal could face opposition from the SPD, which has signaled that their support of the defense package is linked to the materialization of the infrastructure fund. Even though the Left party is in favor of more infrastructure investments this would not be an easy route as they might ask for far-reaching concessions and the CDU/CSU have, for now, ruled out any collaboration with the Left.

Next steps – second/third reading in the Bundestag on March 18 will be decisive

The second and third reading in the Bundestag, scheduled for March 18, will be decisive. In the second reading the Bundestag will decide on alterations of the draft law, while during the third, and final reading, the draft law needs to achieve a two-thirds majority to pass.

Bundesrat vote on March 21 – somewhat less of a hurdle

The vote in the Bundesrat – the second chamber comprising the sixteen state governments – is expected to take place on March 21. The session is scheduled to start at 9.30 am CET (see schedule). The eventual fiscal compromise is likely to entail a significant fiscal boon for the federal states, with as much as €200 bn of the off-budget infrastructure fund to go to the federal states in addition to their net borrowing cap being lifted from 0% to 0.35% of GDP. Thus, they should have a clear incentive to vote for it.

In the Bundesrat the vote will mainly depend on the support of the Greens and the Free Voters, the CSU’s junior coalition partner in Bavaria.

Might the constitutional court throw a spanner in the wheels?

On Monday, the AfD and the Left filed motions for preliminary injunction before the constitutional court in an attempt to prevent the old Bundestag from passing the proposed fiscal reforms. In their motions the Left argues that a decision in the old Bundestag would exclude numerous newly elected Bundestag members, infringing upon their participatory rights. The AfD bases its lawsuit on the argument that the outgoing Bundestag lacks the authority “to make such far-reaching decisions as several highly contested amendments to the constitution” (thus, in addition to the motions for preliminary injunction, it filed a motion for a “Organstreit proceedings”). The decision is expected shortly.

In July 2023, the constitutional court halted a vote on the “heating law” due to a similar complaint regarding insufficient deliberation time. However, the Bundestag administration asserts there’s no minimum period for convening a special session, potentially mitigating the legal risk. Were the constitutional court to put a halt to a vote before the end of March, on the grounds of there not being sufficient time for deliberation, this would effectively scupper a debt brake reform in the outgoing parliament.

BSW motion on election result before the constitutional court. On Tuesday, the far-left BSW filed a motion for preliminary injunction before the constitutional court in order to postpone the announcement of the official federal election result on Friday. The BSW narrowly missed entering the Bundestag with 4.972% of the votes according to provisional results. Legal experts see rather low chances of this motion for a recount being successful. If the BSW were successful and entered the Bundestag after a recount, the CDU/CSU and SPD would no longer achieve a majority in the new Bundestag.