'Germany is back': Merz secures support for debt deal

German Chancellor-in-waiting Friedrich Merz says he had secured the crucial backing of the Greens for a massive increase in state borrowing, clearing the way for the outgoing parliament to approve it next week.

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 ($A862 billion) fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth in Europe's largest economy.

With the Greens, they now have the two thirds majority necessary to pass constitutional amendments, with a vote scheduled for next week.

Merz has justified the need to push the package through the outgoing parliament after recent shifts in policy in the United States under President Donald Trump, warning that a hostile Russia and an unreliable US could leave the continent exposed.

"It is a clear message to our partners .. but also to the enemies of our freedom: We are capable of defending ourselves," Merz, whose conservatives won the election, told a news conference.

"Germany is back. Germany is making a significant contribution to the defence of freedom and peace in Europe," he added.

News of the deal lifted euro zone government bond yields, shares and the euro on expectation the borrowing plan would boost the wider European economy. Germany's benchmark DAX stock index was up almost two per cent, while the mid- and small-cap indexes rose over three per cent each. The euro rose 0.5 per cent - taking its gains so far this month to five per cent.

Merz wants to secure the funds before a new parliament convenes on March 25, where they risk being blocked by an expanded contingent of far-right and far-left MPs.

The compromise reached with the Greens includes the allocation of 100 billion euros ($A172 billion) for the climate and economic transformation fund from the 500 billion euros ($A862 billion) earmarked for infrastructure, he said.

It also includes a change to the constitution that would see expenditures for defence, civil and disaster protection, intelligence services, information security exempt from borrowing limits - so-called 'debt brake' - if they exceed one per cent of economic output.

The reforms would mark a rollback of those debt rules, imposed after the 2008 global financial crisis but since criticised by many as outdated and putting Germany into a fiscal straitjacket.

"With today's plan, the debt brake might not be entirely dead but rather buried alive," said Carsten Brzeski, global head of macro at ING.

"The only limiting fiscal rule for the German government will be the (EU) Stability and Growth Pact. And we know from past experiences that these rules can be soft as butter if needed."