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Germany Sees at Least 80 Billion Euros in New Debt Next Year

Germany Sees at Least 80 Billion Euros in New Debt Next Year

Germany’s federal government is looking at a budget deficit of more than 80 billion euros ($94 billion) next year as it seeks to sustain the recovery from the coronavirus pandemic, according to two officials familiar with its discussions.

Finance Minister Olaf Scholz, who has yet to comment publicly on any budget figures for next year, floated the initial estimate at a meeting of the governing coalition last week, one of the officials said. A second official indicated that the number may eventually be slightly higher. A finance ministry press officer declined to comment.

Germany’s benchmark bonds reversed gains briefly, sending the yield up by about one basis point. But by 2:35 p.m. in London, the yield was back down again, falling two basis points to minus 0.49%.

Germany Sees at Least 80 Billion Euros in New Debt Next Year

Chancellor Angela Merkel’s Christian Democrat-led group, which governs with Scholz’s Social Democrats, on Wednesday agreed to suspend constitutional restrictions on federal government borrowing for a second year in 2021, paving the way for her administration to maintain fiscal stimulus as the country prepares for a general election due by September.

The government is due to publish a draft 2021 budget this month once it has updated tax revenue forecasts, which Scholz will present in Berlin next Thursday.

In the face of the coronavirus lockdown, Germany abandoned its long-standing balanced budget policy in March and is set to borrow about 218 billion euros this year.

Ralph Brinkhaus, the head of Merkel’s caucus, said expensive programs like job-preserving subsidies -- which the government last month agreed to extend until the end of 2021 -- are necessary at the moment, but should not be continued “for too long.”

“It’s about finding a balance, and that also goes for the budget,” Brinkhaus said Thursday in an interview with ARD television. “We have budgeted well in recent years and it was right to spend the money now in the crisis,” he added. “But it would be wrong to continue spending so much forever.”

Partly thanks to the government’s stimulus program, German activity has staged a strong rebound after collapsing in the second quarter, and companies have turned slightly more optimistic that it will continue to accelerate into next year.

Germany Sees at Least 80 Billion Euros in New Debt Next Year

Including programs to guarantee company liquidity, the government has made more than 1.3 trillion euros available -- the most in the European Union by far.

Merkel last week indicated that she favored maintaining as much budgetary flexibility as possible given the uncertainty the country is facing. Some in her party had been pushing for greater fiscal restraint already in 2021.

In her annual summer news conference, the chancellor warned that the coronavirus crisis will get worse before it gets better and that the fallout will test Germany’s finances for months, if not years.

“In retrospect, I’m happy we didn’t succumb to the sweet poison of borrowing in good times,” Merkel said, adding that this had given Germany more resources to fight the crisis now.

‘Lax Course’

Bundesbank President Jens Weidmann said Thursday that Germany’s finances can cope with the increase in debt as long as it is temporary. The central bank estimates that public debt as a percentage of gross domestic product will swell toward 75% this year, from around 60%, still well below many of the world’s major economies.

“Fiscal policy should not get used to a lax course, nor should it rely on interest rates remaining so low over the long term,” Weidmann said in an online speech. “Therefore, after the crisis, it is important to reduce the increased debt ratio again.”

Scholz reiterated Thursday that Germany should aim to get its finances back to “normal” in 2022 after the “crisis-fighting budgets” for this year and for 2021.

“We will again next year have to take on more debt beyond the usual limits,” Scholz said during a virtual banking conference. “After that, we will try to get back to a normal situation.”

Scholz is the Social Democrats’ chancellor candidate for the national elections due in September next year.

©2020 Bloomberg L.P.