EU budget talks face uncertainty as Germany’s Merz weakens

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EU budget talks uncertainty

Highlights

Merz's Christian Democrats suffered election setbacks in Saxony-Anhalt and Mecklenburg-Vorpommern, undermining his authority in EU budget negotiations.
Failure to reach agreement on the 2028-34 EU budget by December risks affecting beneficiary payments from 1 January 2028 and damaging the EU's credibility.
Germany, led by fiscally conservative Merz, is demanding several hundred billion euros in cuts from the European Commission’s €2tn proposal, weakening prospects for flexible economic policy compromise.

Budget negotiations under pressure

As reported by Financial Times, EU officials are reassessing what can realistically be achieved in the coming months after heavy losses for Merz’s Christian Democrats in regional elections weakened his authority in Brussels.

Officials involved in the talks say Germany’s backing is central to securing agreement on the 2028-34 budget, and that a deal by year-end becomes much harder if Berlin cannot firmly support a compromise or help steer it. Merz says he still has vital tasks to pursue, including the budget negotiations, and says he is intensively discussing how to handle spending on competitiveness, defence and resilience.

Merz insists he wants to remain chancellor and leader of the Christian Democrats after poor results in two eastern German states. In Saxony-Anhalt, Alternative for Germany comes first in a vote earlier this month and is seeking to form a regional government for the first time, while in Mecklenburg-Vorpommern the CDU falls below the 5 per cent threshold for entry to a state parliament for the first time in the party’s 81-year history.

Broader risks for EU policy agenda

EU leaders warn that failure to agree the budget by the end of December could leave the bloc without a deal before payments are due to begin in January 2028. Thomas Byrne, Ireland’s EU affairs minister, says that without agreement this year, beneficiaries from 1 January 2028 would be affected and the European Union’s credibility would be damaged.

Beyond the budget, Brussels is also trying to respond to China’s trade threat, reduce the burden of climate rules on struggling businesses and maintain support for Ukraine. Senior officials and diplomats say Germany has traditionally played a key role in breaking deadlocks, but argue that Merz is no longer in a position to perform that function.

Merz leads a group of fiscally prudent countries that is pushing for several hundred billion euros in cuts to the European Commission’s opening €2tn proposal. Officials say either a weakened Merz cannot take bold decisions, or any replacement would arrive with a new team and approach and need months to settle in, limiting the prospect of greater German flexibility in budget and wider economic policy talks.

Our earlier report on Germany’s debt-brake relaxation for defence and infrastructure spending explained that the policy shift began to lift growth and corporate earnings expectations, even as the benefits reached households only unevenly. It also noted that defence outlays were ramping up faster than major infrastructure projects, while weak consumer sentiment and political uncertainty risked undermining the recovery.

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