Germany Ready to Ditch Balanced Budget to Combat Coronavirus
Germany Ready to Ditch Balanced Budget to Combat Coronavirus
(Bloomberg) -- German Chancellor Angela Merkel’s administration is prepared to abandon its long-standing balanced-budget policy to help finance measures to contain the fallout of the coronavirus.
Given the dimension of the crisis, Merkel and her economic team are now willing to accept deficit spending to help finance containment measures, according to people with direct knowledge of the government’s economic policy. The virus-triggered crisis is one of the “exceptional circumstances” under the constitutional debt brake that allows for additional borrowing, said the people, who requested not to be named because the discussions are not public.
While Merkel’s government is ready to explore additional spending, no decisions have been made on specific measures or an amount. The government did not respond to requests for comment.
The about-turn from Merkel’s Christian Democratic-led bloc comes as economic authorities around the world are stepping up their crisis management, including a stimulus package announced by the European Central Bank on Thursday. For years Merkel’s CDU upheld fiscal discipline as one of its mantras. Party members have half-jokingly boasted that the balanced budget policy, known as the black zero in German, is a fetish of theirs.
Even when Germany flirted with a recession last year, Merkel resisted calls from Washington, the European Central Bank and the International Monetary to loosen its pursue strings. Over the past decade, its savings have cut public debt by more than 20 percentage points to less than 60% of gross domestic product. Last year, Berlin recorded a budget surplus of more than 13 billion euros.
The new stance does not mean that the government is planning to launch a massive stimulus program or raise debt. In fact, the government still has as much as 50 billion euros ($56 billion) in reserves that it could tap. But it does mean that it can ramp up spending beyond budgetary limitations, the people said.
“We don’t want to give it up light heartedly, but what needs to be done will be done,” Andreas Jung, deputy leader of the Christian Democratic-led caucus in parliament, told NTV television on Thursday in reference to the zero deficit policy.
Major Shock
A day before Merkel gave her first indication of a change in attitude when she said that the government would do “whatever is necessary” to combat the crisis triggered by the virus.
Any measures need to be timely and targeted as the outbreak already constitutes a “major shock” to global growth prospects, ECB President Christine Lagarde said after laying out Europe’s monetary answer to the crisis.
“An ambitious and coordinated fiscal policy response is required to support businesses and workers at risk,” Lagarde said.
Germany, where the death toll has been far below that in Italy or Spain, has been gripped by crisis mode this week. Visits to the iconic dome of the Reichstag have been banned and soccer games are being held in empty stadiums. The CDU on Thursday postponed the party conference that was to elect a new leader and potential Merkel successor on April 25, extending uncertainty at a time of political and economic turmoil.
Europe’s largest economy is set to enter recession “with all certainty” in the first half of the year, seven leading forecasters said this week.
Until then officials said that they will look for clear evidence of a deep economic crisis before unleashing classic stimulus measures.
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To contact the reporter on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net
To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, ;Chad Thomas at cthomas16@bloomberg.net, Raymond Colitt, Caroline Alexander
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