GERMANY: Pistorius Seeks E60bln/Year For Defence As Merz Visits Paris & Warsaw
Reuters reports that Defence Minister Boris Pistorius is seeking a significant increase in Germany's annual defence budget, according to two of its sources. Pistorius, who hails from the centre-left Social Democrats (SPD) and in opinion polling is one of Germany's most popular politicians, is aiming for more than E60bln per year in new defence spending from 2025 onwards, according to one of the sources. SIPRI reports German defence spending came in at USD88.5B in 2024.
- In the run up to his (chaotic) confirmation as chancellor on 6 May, Friedrich Merz has sought to emphasise that his gov't will not only take a leadership role in European security with rhetoric, but by committing to significant increases in defence spending.
- Indeed, Merz is using his first full day in office not to shore up his domestic alliances, but instead to travel to Paris and Warsaw for talks with French President Emmanuel Macron and Polish PM Donald Tusk, respectively.
- Roderich Kieswetter, a lawmaker from Merz's centre-right Christian Democratic Union (CDU), told Politico, "What’s needed now is a credible German contribution to Europe’s deterrence posture [against Russia]...[Merz] must meet [Macron and Polish Prime Minister Donald Tusk] with a tangible and credible military and personnel commitment.”
- A major uptick in defence spending from Germany is seen as crucial to Merz's efforts to show unity of purpose from European countries ahead of what could prove a frosty NATO summit in the Netherlands in mid-June.
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GERMANY: Merz Facing Pressure On Economy & Immigration In Coalition Talks
Reuters reporting comments from chancellor-in-waiting Friedrich Merz regarding the situation in financial markets, calls the situation "dramatic" and it "threatens to get worse, [it is] therefore more urgent than ever to restore international competitiveness...competitiveness must be at the centre of coalition talks." Talks between Merz's centre-right Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU), and the centre-left Social Democrats (SPD) on forming a governing coalition continue.
- The current economic and financial market instability is adding to pressure on all parties to reach a swift agreement that will see a new gov't come to power able to implement policy to ameliorate the impact (the current caretaker gov't of Chancellor Olaf Scholz is more limited in its political room for manoeuvre).
- Merz is not only facing pressure as a result of economic instability, but also political concerns within the CDU. Recent opinion polling has shown the far-right Alternative for Germany (AfD) gaining support, with the latest INSA poll showing the AfD level with the Union parties on 24%. This marks the first time the AfD has ever (jointly) topped a nationwide opinion poll. As INSA notes, this represents a "loss of support that has never been seen before in the period between the Bundestag elections and the formation of a government".
- This has seen pressure on Merz to hold firm in coalition talks with regards to not only economic policy but ensuring a hard line on immigration. The 'final round' of negotiations is set to get underway today.
GERMAN DATA: Chinese Dynamics / US Tariffs Provide Downside Risk [2/2]
- Looking ahead, the March rise in German IFO export expectations may be highly discounted after the US administration's tariff announcements last week.
- Outside of the downside risks of German exports to the US, also note that a significant downside driver to the German trade balance since 2022 were exports to China (they fell 26% when comparing the latest three months available to Jan-Mar 2022), while imports from the country broadly sidelined since 2023. This comes against the backdrop of reports (here, here) suggesting China has built significant manufacturing overcapacity in recent years, indicated by domestic supply rising faster global demand, rising numbers of lossmaking industrial firms in the country, as well as declining capacity utilization.
- Against the backdrop of high US tariffs on Chinese goods, this poses further downside risk to the German trade surplus (and industrial production), as a) there appears to be no imminent rationale for Chinese demand for German industrial products to pick up materially again and b) lower US demand for Chinese manufacturing exports might mean higher supply at lower prices of these products in Germany.
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