Merkel calls for more German military spending, but SPD eyes tax cuts

BERLIN (Reuters) - Chancellor Angela Merkel on Wednesday said the state of the German military was "not satisfactory" and called for increased military spending to cover a wide range of gaps. Merkel's comments came amid a widening conflict with the Social Democrats (SPD), junior partners in her coalition government, about military expenditure, with the center-left SPD favoring moves to lower taxes and investment in digitalization. The conservative leader told fellow Christian Democrats (CDU) at an event in Berlin it was clear that funds were lacking "in every nook and cranny" of the German military. "When it comes to the Bundeswehr, we must make progress," she said. "We certainly won't get better with less money." Critical ministry and parliamentary reports this year showed that missing spare parts and quality defects had curtailed the readiness of German submarines, warplanes and other key weapons after years of declining spending after the end of the Cold War. Finance Minister Olaf Scholz, a Social Democrat, last week drew the ire of conservative Defense Minister Ursula von der Leyen with a plan that would see military spending rise in 2019 as a percentage of economic output, but fall thereafter. Von der Leyen and the conservative leader of the development ministry objected in writing to Scholz's longer-term budget plans, saying they violate the coalition pact signed by the two political blocs in February. Merkel said the current level of military spending by Europe's largest economy often sparked questions about Germany's commitment to move toward the NATO target of spending 2 percent of economic output on defense. "I'm very happy that we were able to write down in the coalition agreement that we do feel obligated to these targets from Wales (the 2014 NATO Summit in Wales) that all agreed there," she said. "One also has to put one's cards on the table." Just hours later, however, Scholz told reporters that Germany's tax estimates showed only limited scope for additional fiscal spending through 2022 and the money would be used to lower income taxes from 2019 and hike investments in digitalization by 2.4 billion euros in 2018. No comment was immediately available from the defense ministry, which argues that coalition agreement explicitly stated that additional funds would be used for foreign policy, security and development needs. The plans also flout the coalition's agreement to ensure that development aid and defense spending did not shrink as a percentage of economic output in the coming years. The lack of a more pronounced increase in military spending has angered U.S. officials, who have been pressing Germany to more rapidly toward the NATO target of spending 2 percent of economic output on defense. The new U.S. ambassador to Germany, Richard Grenell, told embassy staff on Wednesday that his number one priority would be to press the German government to increase its share of funding NATO's collective defense needs, according to a U.S. source. "This is not being taken seriously enough," said the source. "The two percent is largely symbolic, we all know that, but everybody agreed to move in that direction." (Reporting by Gernot Heller and Andrea Shalal; Writing by Madeline Chambers and Andrea Shalal; Editing by Michael Nienaber and Richard Balmforth)