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Germany tears up fiscal rule book to counter coronavirus pandemic

Coronavirus pandemic

Germany tears up fiscal rule book to counter coronavirus pandemic

Berlin to raise €150bn in new debt to bolster ailing economy

A woman watches a televised address to the nation from German chancellor Angela Merkel © ARMANDO BABANI/EPA-EFE/Shutterstock

Germany is to take on more than €150bn of new debt as part of a sweeping package of emergency measures to save its economy from the brutal effects of the coronavirus pandemic, in what amounts to a radical break with the strict “black zero” fiscal policies of the past.

Finance minister Olaf Scholz will also present the German cabinet with plans to create a new €500bn bailout fund to rescue companies hit by the outbreak, according to three people familiar with the plans.

The measures mark a new era in German fiscal policy and an abrupt departure from Berlin’s long-held commitment to balanced budgets — the mantra of “schwarze Null”, or “black zero”, that has been such an abiding feature of Angela Merkel’s time in office.

It reflects growing alarm in government circles at the profound impact the epidemic is having on the eurozone’s largest economy, as big industrial companies close factories, the service sector is disabled and economic activity melts away. 

At a cabinet meeting on Monday, Mr Scholz will present plans for a €156bn supplementary budget for 2020 and a new €100bn economic stabilisation fund — to be known in German as the WSF — that can take direct equity stakes in stricken companies. It will also be equipped with €400bn in state guarantees to underwrite the debts of companies affected by the turmoil, bringing its total firepower to €500bn.

Mr Scholz also envisages a €100bn government loan to KfW, the state development bank, which has been empowered to provide unlimited cash to businesses struggling with the fallout from the pandemic.

Taken together, the supplementary budget, plus the €100bn for the WSF and the €100bn loan to the KfW amount to €356bn — or about 10 per cent of Germany’s GDP.

The WSF will be in effect be a “reactivation” of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. Soffin currently manages the government’s 15.6 per cent stake in Commerzbank, which it rescued during the global financial crisis. 

The WSF will not only underwrite companies’ debts but also recapitalise those experiencing financial difficulties due to the coronavirus turmoil, effectively paving the way for a wave of partial state takeovers.

Just as the government helped the banks after the collapse of Lehman Brothers, “we are now prepared to provide equity for the real economy,” Mr Scholz told German radio on Friday. The state had to help companies “that employ an incredible number of men and women and which all of a sudden have no business”. 

The WSF could presage an extraordinary intervention by the state in the private sector. “We will not allow a bargain sale of German economic and industrial interests,” economic affairs minister Peter Altmaier said on Friday. “There should be no taboos. Temporary state aid for a limited period, up to and including shareholdings and takeovers, must be possible.”

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Even before the coronavirus pandemic first struck, Germany’s addiction to the “schwarze Null” and aversion to new debt was facing mounting criticism. For months, leading economists both at home and abroad have been urging the government to take advantage of low interest rates to take on new debt and invest in Germany’s crumbling infrastructure.

Yet since the full scale of the outbreak became clear, Ms Merkel has stressed that the survival of the German economy was a far bigger priority to her than her commitment to the black zero. 

“We’re doing whatever is necessary,” she said on March 11. “And we won’t be asking every day what it means for our deficit.”

The new fiscal policy came as a number of German regions imposed a lockdown on their citizens and closed all restaurants, bars and beer-gardens. Bavaria said people would only be allowed to leave their homes to go to work, buy food or visit the doctor, while the German foreign ministryadvised against any tourist travel abroad until the end of April. 

As well as passing the supplementary budget and setting up the WSF, ministers meeting on Monday will be asked to loosen one of the country’s most important fiscal rules — the constitutional debt brake. Introduced in 2009, it limits any new government borrowing to just 0.35 per cent of GDP, adjusted for the economic cycle.

But exceptions are allowed. Germany’s constitution says the Bundestag can relax the debt brake when the country is hit by emergencies such as natural catastrophes that “significantly impact the government’s fiscal position”. Coronavirus is a clear example of such an eventuality. A Bundestag vote is expected in the next few days.

“This essentially paves the way for unlimited borrowing,” said one of the people familiar with Mr Scholz’s plans. He said it fitted with the European Central Bank’s announcement last week that it would buy an extra €750bn of bonds in a bid to calm markets thrown into turmoil by the pandemic. “The ECB’s message to the EU member states was clear,” he said. “Fill your boots with debt.” 

Though the proposals being put before the cabinet on Monday mark an extraordinary volte face in policy terms, officials stress that Germany was only able to adopt such expansionary measures thanks to the budgetary restraint of the past few years.

“Even a few weeks ago people were saying we’d gone too far, that we were too focused on husbanding our resources,” Mr Scholz said on Friday. “Now you can see we acted correctly.” 

Germany’s “economising” over the past few years had brought its debt-to-GDP ratio to below 60 per cent, he said. The equivalent figure in France is 98.9 per cent and 134.8 per cent in Italy.

Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, said that until recently there had been “passionate debate” in Germany about the wisdom of sound public finances. 

“Now we can see very clearly: it was exactly right that Germany consolidated its budget when the economy was doing well,” he told Die Welt on Saturday. “Now we have the latitude to deal with this crisis. Our starting position is advantageous.”

This article has been updated since original publication to say that the figure for new borrowing is €156bn, which will be part of a €350bn package of measures.

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