German coalition reaches late-night budget deal, averting collapse

Germany's governing coalition of the CDU/CSU and SPD reached a budget agreement early Tuesday morning, averting a potential collapse after all-night negotiations. The agreement was announced at 6 a.m. following sessions that extended through the previous day. The central dispute had concerned defence spending, with the CDU/CSU pressing for increased military procurement and the SPD opposing the use of new borrowing to fund it.

The resolution involved restructuring existing defence contracts rather than taking on additional debt. The approach provided the CDU/CSU with the increase in military procurement it had sought while avoiding the new borrowing the SPD had said it could not accept.

German bond markets stabilised following the announcement. Chancellor Friedrich Merz said the coalition had demonstrated it could 'make hard decisions under pressure.' SPD leader Lars Klingbeil described the outcome as a 'responsible compromise in difficult circumstances.'

The agreement is expected to carry the coalition through the remainder of the current parliamentary term. Financial analysts and some SPD backbenchers who had argued for a harder position on borrowing said they would scrutinise the mechanics of the contract restructuring approach in the coming weeks.