EUR/USD failed to push decisively above 1.0950 despite the approval of the massive defence and spending plan in Germany. This should not come as a surprise. EUR has already appreciated a hefty 5.4% this month on the “ReArm Europe” Plan announced by the European Commission on March 4th.
With the CDU/CSU and Social Democrats having secured the support of the Greens, the outgoing Bundestag voted 513-207, surpassing the two-thirds majority needed to amend the German constitution to relax the debt brake. On March 21st, the Bundesrat will still need to deliver a two-thirds majority (46 out of 69 votes) for the legislation to become law. However, the CDU/CSU, Social Democrats, and the Greens hold only 41 seats and need Bavaria’s six votes to pass the threshold.
While the legislative groundwork has been laid, the incoming Bundestag will face other challenges in implementing this plan. Like it or not, Merz’s success in securing yesterday’s Bundestag vote was attributed to shifting geopolitical dynamics, namely heightened national and continental security concerns from increased uncertainties over transatlantic relations with the Trump administration.
Chancellor-in-waiting Friedrich Merz is looking to form a “Grand Coalition” between the CDU/CSU and the Social Democrats, two political groups with distinct priorities that could lead to internal disagreements. His coalition, even with the Greens, will lack the two-thirds majority in the new Bundestag that starts its first session on March 25th.
The far-right Alternative for Germany (AfD) and far-left Die Linke have increased their representation to over 210 seats in the February 23rd elections. While the outgoing Bundestag’s approval was a significant milestone, implementing the spending plan may require additional legislative actions.
Gaining and maintaining public support will be essential, given Germany’s historical aversion to high debt levels. The plan championed by Merz includes unlimited borrowing to enhance the military and a EUR500bn fund to modernize infrastructure, of which EUR100bn has been earmarked for climate-neutral initiative (in exchange for the Greens’ support). Fitch cautioned that Germany’s AAA debt rating could come under long-term pressure if the extensive spending plan is not balanced by fiscal consolidation measures or fails to result in sustained economic growth. The escalating EU-US tariff spat could hinder the efforts of Germany’s ambitious spending plans to stimulate economic growth. Fitch estimated that the fiscal deficit could widen to 4-4.5% of GDP by 2027 vs. 2.6% in 2024 and lift the debt/GDP ratio to 70%, the worst of the AAA-rated countries.
Quote of the Day
“The key to victory lies more in manipulation and cooperation than in exceptional personal skills.”
Yuval Noah Harari
March 19 in history
In 1918, the US Congress established time zones and approved daylight savings time.
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