Even Virus Risk Can’t Sway Merkel’s Party to Loosen Up Spending

(Bloomberg) --

Chancellor Angela Merkel’s ruling party is putting the brakes on calls for a sweeping stimulus package to help offset the economic fallout from the spread of the coronavirus.

The Christian Democratic Union, which has enshrined fiscal discipline as one of its central tenets, argues that a surge in public spending won’t address the fear factor among consumers and investors -- and would do little to kick-start demand and investment, according to people familiar with the discussion.

On Sunday evening, Merkel will chair a meeting of coalition leaders who will discuss growing concerns that the epidemic could stifle an already wobbly recovery in Europe’s largest economy. The country’s influential industry federation BDI on Thursday warned of the risks of recession this year and urged the government to study “targeted support mechanisms” as well as “long-term growth measures.”

Earlier in the week, Finance Minister Olaf Scholz touted Germany’s preparedness. In the event of “large-scale distortions in the global economy, for instance because global markets and production chains are disrupted, we have all the ability to react to it quickly, decisively and powerfully,” he said.

Yet while Italy is shutting down schools, the number of corporate warnings multiply, and equity markets are pummeled, Germany’s fiscal hawks are stubbornly holding the line as they did last year when Washington, the International Monetary Fund, and the European Central Bank unsuccessfully urged Berlin to loosen its purse strings as a way to bolster a stuttering economy. For years Merkel has stuck to a zero-deficit spending policy which has helped the nation slash public debt by more than 20 percentage points to around 60%.

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Still, amid a growing leadership vacuum in the twilight of Merkel’s political career, the coalition is deeply divided over whether to dip into Germany’s considerable savings and just how to spend them.

Merkel’s Bavarian sister party, the Christian Social Union, initially said as much as 50 billion euros ($56 billion) were available this year if needed. But following criticism from leading Christian Democrats like caucus leader Ralph Brinkhaus, who said it is premature to talk about a crisis, the CSU downsized demands to a package worth around 15 billion euros.

A hodgepodge of policy measures currently being discussed includes public lines of credit for potentially cash-strapped companies, as well as more structural measures such as lower electricity costs and some corporate tax cuts. Scholz backs an earlier-than-planned phaseout of the so-called solidarity tax, which helped finance Germany’s reunification costs over 3 decades, a spokesman of his ministry said this week.

Another idea being dusted off is a plan to offer subsidies for employees to reduce their work load and enter training programs in times of crisis. A similar program back in 2009 helped secure some 1.4 million jobs, according to government estimates.

Deep divisions remain within the coalition as parties push for pet projects, from Scholz’s plans to slash municipal government debt to CSU wishes for tax benefits targeted at tourism and other important business sectors in Bavaria. A working paper presented by Scholz for Sunday’s meeting failed to generate consensus, according to one person who asked not to be named because the discussions weren’t public.

Still, signs of economic malaise are growing. Lufthansa is planning to drastically reduce its domestic and international flights in coming weeks and on Thursday said it would ground more planes due to a high number of cancellations. Employees were asked to take unpaid vacation or to reduce their working hours, according to Der Spiegel magazine.

To contact the reporters on this story: Arne Delfs in Berlin at adelfs@bloomberg.net;Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Raymond Colitt, Iain Rogers

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