Germany Won’t Blink on Fiscal Easing Until Crisis Hits Home

Germany Won’t Blink on Fiscal Stimulus Until Crisis Hits Home

11 Mar 2020, 12:52 PM IST

(Bloomberg) --

Anyone expecting Germany to ride to the rescue of Europe’s economy is in for a wait.

Increasing global pressure and a tally of 1,000 coronavirus cases this weekend still weren’t enough to convince the politicians governing the region’s most fiscally-potent country to unleash a major stimulus. That reticence is likely to endure as long as they deem the outbreak’s effect on consumer spending to be temporary and containable.

Germany Won’t Blink on Fiscal Easing Until Crisis Hits Home

Such a policy is consistent not only with Germany’s long-held reluctance to take on debt, but also its previous playbook in fighting the 2008 financial crisis with a slow-motion reaction. While that approach may frustrate Group of Seven counterparts holding out for the country’s fiscal firepower to bolster a joint response, it isn’t their tax money to spend.

“I’m pretty sure if it’s necessary the government will do something, but experience shows they’ll have a bit of a hard time with it,” said Andreas Scheuerle, economist at DekaBank in Frankfurt. “It will be a reactive rather than proactive actor.”

That slog was underscored by the seven-hour marathon of crisis talks on Sunday night between politicians in Germany’s coalition, which secured only a small step toward fiscal loosening that stopped far short of the stimulus its neighbors wish it would unleash.

Chancellor Angela Merkel and colleagues agreed on measures helping companies to halt work temporarily, and an investment boost starting next year. The focus is firmly on cushioning the blow for businesses rather than helping out consumers, and the package didn’t even incorporate the mooted acceleration of an income-tax cut that is already planned later in the year.

Finance Minister Olaf Scholz said the government will do “everything” to ensure the economy weathers a crisis, and Alexander Dobrindt, the parliamentary caucus leader of the Bavarian CSU, said that more measures are in the pipeline.

But for now, the response looks likely to be a drip-drip approach reminiscent of the Lehman Brothers turmoil. Back then, initial limited stimulus including shorter working hours and tax write-offs in December 2008 was eventually followed by much bigger easing including a cash-for-clunkers program for cars.

With fiscal probity seen as a mark of German political virility, and a brake on debt even written into the constitution, only a full-blown economic crisis is likely to shift the view in Berlin toward a major stimulus. That predicament isn’t apparent as long as unemployment is close to a record low and showing no sign of increasing.

Before deciding on the need for stimulus, the epidemic’s impact on growth must be evident, Economy Minister Peter Altmaier said on Tuesday, adding that projections of the leading research institutes in early April would help provide clarity. Stimulus measures were discussed between Altmaier and economy ministers from state governments but currently deemed not necessary, according to Bremen’s economy minister Kristina Vogt who participated in the talks.

Industrial production statistics released on Monday even suggested a rebound in January.

Officials want to avoid action that would signal panic too, an attitude reflected in media commentary that urges carrying on as normal.

“All of us should continue to live, work, spend money -- and above all, spend money,” an editorial in Germany’s mass tabloid Bild said on Monday. “Corona is no reason to postpone purchases or not to order the new Golf.”

What Bloomberg’s Economists Say...
European governments can’t prevent the coronavirus outbreak from hitting the economy. What they can do is help it bounce back once the epidemic has passed. By keeping capital flowing and supplementing incomes, the needless bankruptcy of cash-strapped but viable businesses can be avoided. Plans are coming along, but politicians have more to do.
--Jamie Rush and Maeva Cousin. See their EURO-AREA INSIGHT

But for the European Central Bank, which has pressed for rich countries like Germany to increase stimulus for a while, the economic turmoil caused by the virus only makes such action more urgent. Its officials face pressure to act this week with measures that include an interest-rate cut, despite severely limited monetary ammunition.

The region should prepare a “strong, massive and coordinated” fiscal stimulus,” French Finance Minister Bruno Le Maire told France Inter radio on Monday. The threat facing the economy was laid bare in a briefing note by European Commission officials last week warning of the risk of “cascading effects” on economies and markets from the outbreak.

With that in mind, Germany has signed up to statements by the G-7 and the European Union to use fiscal measures “where appropriate,” without going much further.

Merkel has no intention to heed calls for Berlin to open its purse strings when EU leaders hold a videoconference later on Tuesday to coordinate their virus response, according to a person with direct knowledge of her position. Instead she will focus on the need to help companies with liquidity issues.

In the meantime, coronavirus cases in Germany continue to rise, and institutions there including the European Central Bank and Deutsche Bank, the country’s biggest lender, now have infected staff. The first German deaths from the disease have also been reported.

The worsening outbreak sharpens the dilemma for a political class determined to protect the economy, while at the same time committed not to waste years of hard-fought surpluses on unnecessary stimulus. Janwillem Acket, chief economist at Julius Baer in Zurich, says the spectacle isn’t inspiring.

“Germany isn’t making a good impression, and that’s a risk because Germany is an economic powerhouse,” he said. There’s “weak leadership in Berlin.”