MNI INTERVIEW: German Budget Talks Likely To Extend Into 2026

Discussions over how to fill the hole in Germany’s 2027 budget mean Chancellor Friedrich Merz’s so-called “autumn of reforms’ are likely to be delayed into the spring, a leading coalition government adviser told MNI.

Contrary to Merz’s optimism regarding progress before the winter, it is more likely to be early next year before all the parties involved are in full agreement, said Jens Suedekum, personal adviser to the Social Democratic Party Finance Minister Lars Klingbeil, though he added that the “broad agenda is clear.”

Separate conversations regarding federal budgets for 2027, 2028 and 2029 are ongoing, with the government expecting to plug a EUR 32billion gap in funding for 2027 through a mixture of tax increases - notably inheritance tax - and cuts to social spending, he said.

“It will be a pretty big package. I can’t promise it will happen this fall – it may take until March or April – so some people will be disappointed. But both coalition parties recognise that this is what’s needed. The key discussion is around fairness. It can’t all be cuts to social welfare. It must be a fair package. And there will have to be compromises from both partners,” Suedekum said in an interview.

German headlines have been dominated by job losses in recent weeks, with an estimated 51,000 jobs shed in the car industry alone this year - a trend Suedekum attributed largely to structural problems and Chinese overcapacity.

“I would still say that this big fiscal package is the right answer. It’s hard to see where foreign demand is going to come from, so it ought to come from within Europe,” he said.

INNOVATION

The fiscal package’s primary role is not to prolong the life-cycle of existing business models, Suedekum said, but rather to create the conditions in which the private sector, supported by the Deutschlandfonds (Germany Fund) investment vehicle, can innovate, with defence at the forefront.

“The defence ministry has no experience in capital markets. They don't talk to big private investors every day. But if the two elements can come together the result will be new defence startups. There is a lot of interest from U.S. capital investors, life insurers, pension funds and so forth, in investing in German electricity networks, because they generate pretty stable cash flow,” Suedekum said.

Talks are underway on local-content clauses for defence and infrastructure procurement - such as steel - Suedekum said, with European level discussions likely to intensify next year.

Doubts raised by other economists over how efficiently the government’s EUR500 billion infrastructure fund will be spent are “mostly false,” he said. (See MNI INTERVIEW: German Fiscal Boost Impact Limited - Bofinger)

While there will be a “certain amount wastage” at regional level - as individual states exercise their right to spend on consumption rather than investment - strict constitutional rules governing the use of federal funds mean the pattern will not be repeated on a national scale.

“In the first six months of the government – a very short period of time – we’ve created two budgets, for 2025 and 2026, plus the infrastructure package, plus the fiscal plans, the trajectories on which elements of the plan to spend money on for the next 12 years. This is an important signal.” (See MNI INTERVIEW: German Defence Boost To Fall Short Of EUR500Bln)

One “major concern” is that projects are being held up by over-complicated planning procedures, despite efforts to streamline processes, Sudekum said, with “thousands of lawyers addressing the opposite concern, which only results in further delays.”

Promised reforms include cutting bureaucracy and increasing the labour force, “because otherwise the big fiscal stimulus will just end up in inflation.”

JOINT EU BORROWING

The topic of joint European borrowing remains on the Finance Ministry’s agenda despite political turmoil in key partner France, Suedekum said.

“If you listen carefully to what Minister Klingbeil says in his speeches, it's clear that Germany’s ambitions for Europe are for the long term. I wouldn't expect a big initiative for, for example, joint European borrowing to come within the next three months.

“The logical next step would be to start with a joint German-French initiative - basically to make this German package a European package. This is not something I would expect in the very short term, but in the medium term, I would expect steps in that direction.”