Germany is set to abandon six years of fiscal restraint with a blowout budget designed to save its economy from the brutal effects of the coronavirus pandemic and protect thousands of businesses from imminent ruin.<\/p>\n
Angela Merkel\u2019s cabinet is meeting on Monday to approve new borrowing of \u20ac356bn \u2014 equivalent to nearly 10 per cent of Germany\u2019s gross domestic product \u2014 marking a new era in fiscal policy and a radical departure from Berlin\u2019s long-held aversion to debt.<\/p>\n
It reflects growing alarm in government circles at the profound impact the epidemic is having on the eurozone\u2019s largest economy as big industrial companies shut down production, the service sector is disabled and economic activity melts away.<\/p>\n
Ministers will consider plans for a \u20ac156bn supplementary budget for 2020, including a \u20ac50bn hardship fund to help small businesses and freelancers whose revenues are collapsing as the virus spreads.<\/p>\n
They will also approve a \u20ac100bn economic stabilisation fund that will be used to take stakes in companies crippled by the fallout from the pandemic, according to a person familiar with the plans, paving the way for a radical state intervention in the workings of the market economy.<\/p>\n
The blueprint also envisages a \u20ac100bn loan from the new stabilisation fund to the KfW, Germany\u2019s state development bank, which is providing unlimited loans to firms facing a cash crunch under a programme announced by the finance minister Olaf Scholz earlier this month.<\/p>\n
The stabilisation fund will also be equipped with \u20ac400bn in guarantees to underwrite the debts of companies affected by the turmoil.<\/p>\n
The fund is a reactivation of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. It will not only underwrite debts but also be able to inject fresh capital into stricken companies, effectively paving the way for a wave of partial state takeovers.<\/p>\n
Just as the state helped the banks after the financial crisis, \u201cwe are now prepared to provide equity for the real economy,\u201d Mr Scholz told German radio on Friday. The state had to help companies \u201cthat employ an incredible number of men and women and which all of a sudden have no business\u201d.<\/p>\n
The moves represent an extraordinary intervention by the state in the private sector. \u201cWe will not allow a bargain sale of German economic and industrial interests,\u201d said economy Peter Altmaier. \u201cThere should be no taboos. Temporary state aid for a limited period, up to and including shareholdings and takeovers, must be possible.\u201d<\/p>\n
The huge increase in spending marks a radical break from the \u201cschwarze Null\u201d or black zero, the policy of balanced budgets and no new borrowing that has been part of German economic orthodoxy for years and has helped to deliver six consecutive annual surpluses.<\/p>\n
The policy has become increasingly controversial in recent months, with leading economists both at home and abroad urging the government to take advantage of low interest rates to assume new debt and invest in Germany\u2019s crumbling infrastructure.<\/p>\n
But the black zero is now a thing of the past. Angela Merkel, chancellor, made it clear at the start of the coronavirus crisis that she was prepared to set it aside in order to ensure the survival of the German economy.<\/p>\n
\u201cWe\u2019re doing whatever is necessary,\u201d she said on March 11. \u201cAnd we won\u2019t be asking every day what it means for our deficit.\u201d<\/p>\n
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: they could exercise in the open air but only alone or with close family members. The German foreign ministry has also advised against any tourist travel abroad until the end of April.<\/p>\n
As well as passing the supplementary budget and reactivating Soffin, ministers will also be asked to loosen one of the country\u2019s most important fiscal rules \u2014 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.<\/p>\n
But exceptions are allowed. Germany\u2019s constitution says the Bundestag can relax the debt brake when Germany is hit by emergencies such as natural catastrophes that \u201csignificantly impact the government\u2019s fiscal position\u201d. Coronavirus is a clear example of such an eventuality. A Bundestag vote is expected in the next few days.<\/p>\n
\u201cThis essentially paves the way for unlimited borrowing,\u201d said the person familiar with Mr Scholz\u2019s plans. He said it fitted in with the European Central Bank\u2019s announcement last week that it would buy an extra \u20ac750bn of bonds in a bid to calm markets thrown into turmoil by the pandemic. \u201cThe ECB\u2019s message to the EU member states was clear,\u201d he said. \u201cFill your boots with debt.\u201d<\/p>\n
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.<\/p>\n
\u201cEven a few weeks ago people were saying we\u2019d gone too far, that we were too focused on husbanding our resources,\u201d Mr Scholz said on Friday. \u201cNow you can see we acted correctly.\u201d<\/p>\n
Germany\u2019s \u201ceconomising\u201d 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.<\/p>\n
Meanwhile, the public finances have rarely been in such robust health. There are reserves of \u20ac55bn in the federal budget, of \u20ac26bn in the federal labour office, which dispenses unemployment benefit, of \u20ac103in the social security system, and of nearly \u20ac20bn in the health service \u2014 the statutory \u201cKrankenkassen\u201d.<\/p>\n
Jens Weidmann, head of the Bundesbank and a member of the ECB\u2019s governing council, said that until recently there had been \u201cpassionate debate\u201d in Germany about the wisdom of sound public finances. \u201cNow we can see very clearly: it was exactly right that Germany consolidated its budget when the economy was doing well,\u201d he told Die Welt on Saturday. \u201cNow we have the latitude to deal with this crisis. Our starting position is advantageous.\u201d<\/p>\n