[ANALYSIS] Agreement on German fiscal reform, though there are still some hurdles ahead

TL/DR

• CDU/CSU, SPD and Greens have come to a deal on fiscal reform. Slight tweaks to the package initially proposed by Merz but the broad measures are much the same and the package is therefore substantial. The bill is set to be voted on in the Bundestag on March 18th and should, given the three mentioned parties are in favour, hit the two-thirds threshold for constitutional reform. However, there are some potential stumbling blocks to this. Updates which have bolstered the EUR and hit Bunds.

MARCH 13TH DEBATE

• On Thursday the main parties held a debate in the Bundestag. From this, it was clear that CDU’s Merz had made some concessions but not to the degree that the Green’s wanted. An assessment Merz seemed somewhat exasperated by in the debate.


• Before the debate had begun, the Greens had briefed that sufficient progress had not been made but that they expected to continue to negotiate before the second and third readings of the reform bill.

MARCH 14TH UPDATES

• Numerous sources throughout the session noting that a breakthrough had been made with details on it trickling through across the morning. Updates which began at 09:54GMT with Reuters sources reporting that the CDU/CSU were to hold a special parliamentary meeting in the afternoon.


• Thereafter, details on the deal broke and have since been confirmed by Merz. In brief, an expanded definition of defence spending will be exempt from the debt brake beyond the 1% of GDP mark (expansion a concession to Greens, though they wanted the threshold at 1.5%); States will receive EUR 100bln from the EUR 500bln fund (Greens had demanded EUR 200bln); EUR 100bln of that EUR 500bln will go to the Climate Protection Fund, KTF (Merz had previously proposed EUR 50bln); funds from the existing budget, i.e. 2024 bill, cannot be transferred into the new fund - in practice this means only “new” measures can be financed from it.


• Merz confirmed that a March 18th Bundestag vote remains the plan. Unclear when he expects it to pass the Bundesrat, but this can be done once the new Bundestag sits if required.


• Alongside announcing the blockbuster spending measures, Merz said they need to continue to cut costs and this will be a feature of coalition talks; specifically, "We will have to continue consolidating,".


• Updates sparked marked strength in the EUR, weighed on Bunds and the broader fixed income complex in addition to lifting German and European equities. Specifically, EUR/USD was around the 1.0855 mark at the time of the 09:54GMT update with Bunds at 127.25. Since, EUR/USD had hit a 1.0912 session and Bunds have been as low as 126.64. The German 10yr yield has printed a 2.936% peak, just shy of the 2.938% high from earlier in the week.


• As a reminder, in a note from March 5th, Goldman Sachs outlined that the fiscal expansion Merz outlined could take the 10yr yield into a 3.00-3.75% range, a move which could extend to the 3.00-4.00% band if it spurs more expansive measures at the EU level.

KEY NEAR-TERM DATES

• Monday, March 17th - Bundestag second reading on the bill.


• Tuesday, March 18th - Bundestag third reading on the bill & vote.


• Tuesday, March 25th - New Bundestag’s first scheduled session.

STICKING POINTS

• Firstly, we are attentive to any breakdown of the deal over the weekend and/or ahead of its third reading in the Bundestag on March 18th. While possible, the unanimous approval of it by those involved in the negotiation make this somewhat unlikely.


• Next, during the vote itself on March 18th, Merz’s reform bill will require almost the full support of the CDU/CSU, SPD and Greens to hit a two-thirds majority in the Bundestag. For this, the bill needs 489/733 members to vote in favour. Votes of the CDU/CSU (196), SPD (207) and Greens (117) provide 520; a figure which provides some margin of error, but a modest rebellion from one or more of the involved parties could see the reform plan defeated.


• Underscoring the urgency is the imminent arrival of the new Bundestag. Within this, a blocking minority of AfD and Die Linke exists as they hold over one-third of the seats in the Bundestag and as such the two-thirds level for constitutional reform cannot be attained.


• Other points of concern are the limited number of days between the bills reading, with bills technically requiring at least seven days between the first reading and vote. While a theoretical blocker, the precedent for this is limited and German press is generally of the view that it will not be an issue. Elsewhere, numerous parties have lodged complaints with the Constitutional Court on the content of the bill and, much more pertinently, the fact that it is being put forward in the old Bundestag. Theoretically, the Court should rule on this before the vote occurs - however, a ruling after the fact and the reform bill (if passed) thereafter being repealed is possible.

14 Mar 2025 - 14:05- ForexData- Source: Newsquawk