Germany's conservatives and Social Democrats (SPD) on Tuesday held talks on forming a coalition as hopes for buoying Europe's largest economy rose on the prospect of a nearly trillion euro borrowing boom to fund military and infrastructure spending.
The need for more military spending to improve Europe's own defence abilities has become urgent since the return to power of U.S. President Donald Trump, who froze military aid to Ukraine after a clash with its President Volodymyr Zelenskiy last week.
People with knowledge of the matter told Reuters on Sunday that the parties were mulling special funds for defence and infrastructure. They said economists had proposed to them sums of 400 billion euros ($420 billion) for the long under-equipped German military and 500 billion for fraying infrastructure. These sums combined would amount to 20% of German GDP.
"In general, this means for Germany and Europe that we must stand more strongly on the side of Ukraine than before," Manuela Schwesig, a senior ranking SPD member and state premier of Mecklenburg-Vorpommern, said while going into the talks.
In addition to helping Ukraine against Russia's three-year-old invasion, Schwesig said, it was important for Germany to "strengthen the Bundeswehr (armed forces) and at the same time have enough money to solve our own problems in the country, for example strengthening the economy."
Markus Soeder, a powerful Merz ally and premier of Bavaria state, told reporters: "I think today is a very, very important day," without elaborating.
Ahead of a special European Union summit on defence spending on Thursday, the European Commission separately proposed a new joint borrowing of 150 billion euros to lend to EU governments for defence as part of an overall 800 billion financing effort.
The prospect of the biggest military spending boom since the Cold War left analysts anticipating a "flood" of German bonds.
($1 = 0.9512 euros)
