German parliament to vote on historic spending surge

By Sarah Marsh and Andreas Rinke

BERLIN (Reuters) - Germany's lower house of parliament is set to vote on Tuesday on a massive surge in borrowing that could boost Europe's largest economy and stimulate growth across the region, even as it faces trade tensions with top partner the United States.

The conservatives and Social Democrats (SPD), who are in talks to form a centrist coalition after last month's election, want to create a 500-billion-euro ($546.05 billion) fund for infrastructure and to ease constitutionally enshrined borrowing rules to allow higher spending on security.

The plans, if implemented, would upend decades of fiscal conservatism, blamed in part for Germany's economic contraction in the past two years, and have already lifted euro zone yields, the euro currency and European shares over the past week. Germany's blue-chip index led the rise in European shares on Tuesday, up 1% as of 0917 GMT.

The leaders of the conservatives, the Social Democrats and the Greens, said on Monday they were confident they could reach the two-thirds majority required to pass the legislation to change the constitution for the fiscal sea change.

"We have for at least a decade felt a false sense of security," Conservative leader and Germany's likely next Chancellor Friedrich Merz told lawmakers on Tuesday.

"The decision we are taking today on defence readiness ... can be nothing less than the first major step towards a new European defence community," he said.

Germany and other European nations have been under pressure to shore up their defences in the face of hostile Russia and shifts in U.S. policy under President Donald Trump, which European leaders fear could leave the continent exposed.

A vote is expected in the afternoon after a morning debate.

Should the legislation pass the Bundestag lower house of parliament, it still has to go to the Bundesrat upper house, which represents the governments of Germany's 16 federal states.

The main hurdle to passage there appeared to fall on Monday when the Bavarian Free Voters agreed to back the plans.

The three parties can together spare around 30 votes and still pass the legislation. The conservatives expect no more than five defectors, party sources told Reuters. One SPD lawmaker is absent due to illness. The Greens expect one lawmaker to vote against the plans while four were absent due to illness, parliamentary group leader Britta Hasselmann said.

The conservatives and SPD want to pass the legislation through the outgoing parliament for fear it could be blocked by an enlarged contingent of far-right and far-left lawmakers in the next Bundestag starting March 25 and Merz has justified the tight timetable with the rapidly changing geopolitical situation.

EASING THE DEBT BRAKE

The reforms, if passed, would mark a major rollback of the so-called debt brake imposed after the 2008 global financial crisis but since criticised by many as outdated and putting Germany into a fiscal straitjacket.

Critics, including within his own party, accuse Merz of "voter fraud" for promising spending restraint during the campaign only to announce the shift in fiscal policy just days after winning.

Economists caution further reforms are needed, for example to cut bureaucracy, to ensure sustainable growth. Merz acknowledged the warning on Monday, hinting at difficult coalition talks with the SPD.

"The problems will not all be solved with the decision tomorrow," Merz said in a post on X late on Monday. "We need to tackle the challenges facing us and we need to present a coalition pact that brings this country forward."

($1 = 0.9157 euros)

(Reporting by Sarah Marsh, Andreas Rinke, Holger Hansen, Madeline Chambers, Matthias Williams and Alexander Ratz; Editing by Rod Nickel and Tomasz Janowski)