Germany's governing coalition of the CDU/CSU and the Social Democratic Party reached a budget agreement in the early hours of Tuesday morning, averting what government officials had privately described as an imminent collapse, following all-night negotiations that extended through the previous day and into a second consecutive night.
Chancellor Friedrich Merz announced the agreement at a 6 a.m. press conference, appearing alongside SPD leader Lars Klingbeil. Both men spoke briefly and avoided triumphalism. "This coalition has demonstrated tonight that it can make hard decisions under pressure," Mr. Merz said. Mr. Klingbeil described the outcome as "a responsible compromise reached in difficult circumstances, which is what governing requires."
The central dispute had been over defence spending. The CDU/CSU had pressed for an increase in military procurement that would require additional borrowing, while the SPD had argued that new debt to fund defence outlays was incompatible with the coalition agreement's commitments on fiscal restraint. The resolution involved restructuring the financing of several existing defence contracts rather than incurring new borrowing — a mechanism that gave the CDU/CSU the effective increase in procurement it had sought while technically respecting the SPD's constraint.
German financial markets responded with visible relief. Bond yields, which had risen sharply in the preceding two days as speculation about a coalition collapse grew, fell back to their pre-crisis levels within an hour of the announcement. The German Bundesbank, in a brief statement, noted that the resolution "removes an immediate source of uncertainty for the German economy."
Several SPD members of the Bundestag were publicly less than enthusiastic about the deal. "It is better than what I thought we would achieve 48 hours ago," one senior SPD parliamentarian said, declining to be identified. "It is not the outcome we would have preferred." Opposition parties characterised the debt restructuring mechanism as an accounting workaround, with the leader of the Greens describing it as "creative but not honest."
The agreement requires approval by the full Bundestag in a supplementary budget vote scheduled for next month. That vote is not expected to be straightforward, with several coalition backbenchers on both sides signalling reservations. A senior CDU official, asked whether the vote would pass, said: "We expect it to. We would not have signed this agreement otherwise."
The coalition, which has governed Germany since the federal election in February, has faced repeated budget disputes that have tested its internal cohesion. Tuesday's agreement was the third time this year that an overnight negotiating session had resolved a dispute that had appeared, at an earlier stage, likely to trigger a formal collapse of the government.