Merkel Stimulus Seals German Shift From Frugality to Largess

(Bloomberg) -- It took Chancellor Angela Merkel two days to broker a 130 billion-euro ($145 billion) package of stimulus measures for the ailing German economy, but economists largely agree the result was worth the wait.

The package -- about 30% bigger than expected -- adds to an effort launched in March that means Germany has now made more than 1.3 trillion euros available to cushion the impact of the coronavirus, by far the most in the European Union. A commitment to balanced budgets has been cast aside to confront the worst economic crisis since the aftermath of World War II.

“It is not only the size of the package which is remarkable, but also the fact that the German government has made a complete U-turn,” Carsten Brzeski, chief euro-region economist at ING, wrote in a note to clients. “From austerity champion to big spender -- a few months ago, concluding with such a comment on German fiscal policy would have been almost unthinkable.”

Highlights of New Stimulus Plan
  • Sales tax cut to 16% from 19% through end of 2020, costing 20 billion euros
  • Bridge financing for small and medium-sized businesses of as much as 25 billion euros
  • Accelerating 10 billion euros in investment in digital, security and defense projects
  • Tax incentives for corporate investment, impacting government revenue by 6 billion euros
  • 5.9 billion euros in aid for municipalities
  • Bonus of 300 euros per child, totaling 4.3 billion euros

Until the coronavirus struck, Germany had long resisted pressure from its partners in the region to deliver a largescale stimulus that, in the hope of some European Central Bank officials, might help stoke economic growth around Europe. In a country where fiscal rectitude is placed on a pedestal, its politicians insisted they wouldn’t add to debts unnecessarily, unless a crisis took hold.

That moment has now arrived. Tense haggling between Merkel’s Christian Democrat-led bloc and her Social Democrat coalition partners produced a hotchpotch of 57 measures ranging from a temporary cut in sales tax designed to lift consumer spending, to cash for building out 5G networks, improving railways and doubling incentives for electric vehicles.

“All in all, the package is thought through, balanced and genuinely makes sense,” Clemens Fuest, president of the Munich-based Ifo research institute, said Thursday on DLF radio. “It’s certainly capable of dampening the recession.”

ECB Decision

Germany is still on course to escape relatively unscathed compared to European peers. Before the latest stimulus was unveiled, the European Commission predicted Europe’s largest economy would shrink around 6.5% this year, compared to almost 10% in Italy and Spain.

Merkel’s new fiscal easing combines with another bond-buying push from the ECB announced on Thursday. The central bank said it will expand its Pandemic Emergency Purchase Program by a bigger-than-expected 600 billion euros to 1.35 trillion euros and extend it at least until the end of June 2021.

While the outbreak-induced lockdown forced thousands of German companies to dismiss workers or even to shutter their business altogether, age-old crisis measures were quickly ramped up. Now, a larger-than-expected second round of stimulus promises to drive the recovery.

Merkel Stimulus Seals German Shift From Frugality to Largess

Christian Odendahl, chief economist at the Centre for European Reform, praised the measures unveiled on Thursday, saying that “very meaningful support” for families and municipalities “will all help a recovery.”

“The VAT cut is the biggest surprise,” Odendahl told Bloomberg. “It’s a broad-based
stimulus” that allows “people to pull forward major purchases.”

The wide reach of the stimulus is what impresses some economists as much as its size. Joerg Rocholl, professor of finance at the European School of Management & Technology, notes that the package is designed to stimulate “as many economic agents as possible.” The psychological impact may also be crucial, he told Bloomberg Television.

“Now the hope is -- and I think maybe that’s more important than the money itself -- to send a very strong signal of encouragement, you could even say a psychological statement, that comes with such a significant amount of money.”

What Bloomberg’s Economists Say...

“The response far outstrips that of its European peers. At 130 billion euros the fresh measures look substantial, but it’s not all new money. What goes out the door this year might be half that amount, offering a boost to activity of up to, but probably less than, 1% of 2020 GDP.”

-Jamie Rush. See his GERMANY INSIGHT

©2020 Bloomberg L.P.

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