Merkel Faces Defense Budget Dispute in Cabinet's First Quarrel

(Bloomberg) -- Chancellor Angela Merkel confronted the first dispute of her seven-week-old coalition government as her defense chief demanded more funding for the military than allocated in a budget plan drawn up by Finance Minister Olaf Scholz.

Defense spending is a central issue dividing the U.S. and Germany. President Donald Trump has singled out Merkel's government for falling well short of a target agreed by North Atlantic Treaty Organization allies of 2 percent of economic growth.

While Merkel has promised to fulfill Germany's NATO spending pledge by the middle of the next decade, her Social Democratic coalition partners have resisted big increases in defense funding. Scholz, an SPD member, said his leeway is constrained by his pledge to maintain a balanced budget.

“The financial planning reflects what we can currently see and calculate,” Scholz told reporters in Berlin on Wednesday, describing the defense increases as “massive.”

The military budget will rise to about 41.5 billion euros ($50 billion) in 2019 from 37 billion euros last year, the Finance Ministry indicated. Scholz said the increases will translate into spending of about 1.28 percent of GDP, a level which he said would remain in place “for the coming years.”

‘Solid Perspective'

Defense Minister Ursula von der Leyen, a member of Merkel's Christian Democrats whose image has been tarnished by accusations that the military lacks readiness, said the budget plan would have to be improved to channel more funds to the military.

“It's important in this budget process that we achieve a solid financial perspective for external security in the coming years,” von der Leyen told reporters after a cabinet meeting on Wednesday. Defense Ministry officials said the Scholz plan would mean a drop in spending as a portion of GDP to 1.23 percent by 2022, Deutsche Presse-Agentur reported.

Merkel signaled that the dispute wasn't yet settled, saying further negotiations will take place over the next two months.

“The budget itself will be decided in July -- and there will certainly be further talks by then,” Merkel said in Berlin.

--With assistance from Birgit Jennen

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Iain Rogers, James Kraus

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