German parties reach landmark debt agreement, sources say

Chancellor-in-waiting Friedrich Merz has secured a breakthrough deal with the Greens, paving the way for a massive state borrowing boost. The agreement, crucial for economic growth and defense spending, sent the euro surging as markets reacted to the historic shift in Germany’s fiscal policy.

German Chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on Friday on a massive increase in state borrowing in Europe's largest economy, sources close to the negotiations said, in news that sent the euro soaring.

Merz's conservatives and the Social Democrats, who are in negotiations to form a government after an election last month, had proposed a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules to revive growth and ramp up military spending.

Decades of German fiscal conservatism have been upended by U.S. President Donald Trump's policy shifts, with Merz warning that Russia and U.S. could leave the Europe exposed.

To reach the two thirds majority required for the necessary constitutional changes, though, they need the support of the Greens who had hitherto rejected their plans, worried the new funds might be used simply to finance policies such as tax cuts.

The three parties, however, reached a deal on Friday, two sources close to the talks said, The news sent euro zone government bond yields, shares and the euro currency jumping on expectation the plan would boost the wider European economy.

"There is a deal," the source said after German newspaper network RND had previously reported a compromise. A Greens source said they were happy with the deal.

One source familiar with the talks said the compromise includes the allocation of 100 billion euros for the climate and economic transformation fund.

The revised debt deal is being examined by finance ministry officials, two parliamentary sources said. Another source said some details were still being hammered out.

The parliamentary groups of all three parties were hastily convened to meet at 12:00 GMT to discuss the deal.

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