The German government is to spend an addition €122.5bn this year to counter the slump caused by the coronavirus as it rips up the fiscal rule-book that has guided Europe’s largest economy for a decade.
Angela Merkel’s cabinet is set to pass a €156bn supplementary budget on Monday, which also foresees a dramatic €33.5bn plunge in tax revenues for this year. It will raise a total of €150bn in extra debt.
Berlin will also set up a €500bn bailout fund that will take stakes in stricken companies, in what amounts to a radical intervention by the state in the workings of the market economy.
Ministers will seek authorisation to suspend the “debt brake”, a measure enshrined in the German constitution that limits new government borrowing to just 0.35 per cent of gross domestic product.
The measures proposed by Olaf Scholz, finance minister, represent a decisive break with the Merkel government’s strict adherence to the “schwarze Null” or “black zero” policy of balanced budgets and no new borrowing.
Already, some are expressing alarm that the new policy strays too far from German economic orthodoxy. The popular newspaper Bild Zeitung called Mr Scholz “the king of debt”, and accused him of building up a “debt mountain of historic proportions”.
But the minister has defended the measures as necessary to deal with the crisis, and said the government was only able to take such far-reaching steps now because of the cautious policies of the past.
“We need enormous financial firepower now. [So] it’s a good thing that we made provisions,” he told the Frankfurter Allgemeine Sonntagszeitung, adding that in the years since the financial crisis of 2008-09 the government had succeeded in bringing Germany’s debt-to-GDP ratio to below 60 per cent. In Italy, by contrast, it is more than 130 per cent.
The extraordinary measures reflect growing government alarm at the economic impact of the coronavirus pandemic, as some of Germany’s biggest companies close down production and social distancing pushes thousands of businesses to the brink of bankruptcy. Last week, Ms Merkel said Germany has not faced such a grave challenge since the second world war.
Leading economists have been supportive of Mr Scholz’s emergency plan. Lars Feld, chairman of the council of economic experts, which advises the government, said Germany could easily digest a sharp rise in borrowing.
“If the debt-to-GDP ratio now rises from 60 per cent to 80 or 90 per cent, the country’s fiscal soundness is not questioned,” he told Die Welt.
The blueprint for the supplementary budget for 2020, seen by the Financial Times, authorises the finance ministry to take out loans of €156bn, which it says exceeds the government’s maximum credit limit by about €100bn. To go above that level, ministers will require a green light from the Bundestag.
The budget provides €3.5bn for immediate measures to deal with the pandemic, such as procuring protective suits and masks, fast-tracking work on a vaccine against corona and repatriating German holidaymakers stranded abroad.
The government also plans to create a €500bn bailout fund, which will be deployed to rescue companies hit by corona and is modelled on a similar facility that saved German banks after the collapse of Lehman Brothers in 2008. That vehicle — Soffin — manages the government’s 15.6 per cent stake in Commerzbank, which it bailed out during the financial crisis.
The new facility, to be known as the Economic Stabilisation Fund, or WSF in German, will have €100bn to recapitalise companies affected by corona and take stakes in them in exchange. It will also be able to assume troubled companies’ debts, to the tune of €400bn.
“We will mobilise the fund for state investments, which was how we stabilised the financial markets [in 2008-9],” Mr Scholz told FAS. “Now it’s more about the real economy.”
“We need to be able to invest equity capital in companies,” he added. “In a difficult situation that’s the best kind of stabilisation.”
But Mr Feld said the government must make clear beforehand when it planned to re-privatise the shareholdings in companies it has acquired during the crisis. “The government took a stake in Commerzbank during the financial crisis and more than ten years later, it’s still there,” he said. “You can’t have that.”
The WSF will also make a €100bn loan to KfW, the German state development bank, which is providing unlimited cash to German companies facing liquidity problems as a result of the corona outbreak.
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The draft law on the WSF, seen by the FT, would authorise the finance ministry to take out €200bn in loans to cover the €100bn for the WSF’s recapitalisation programme and the €100bn loan to KfW.
Combined with the new borrowing in the supplementary budget, the ministry is therefore seeking authorisation to take on a total of €356bn in debt, or about 10 per cent of Germany’s GDP.
Ministers also unveiled other measures to provide relief for companies stricken by the pandemic. The supplementary budget for 2020 includes plans for a €50bn hardship fund that will dispense bridging loans to small businesses and the self-employed to tide them over the coming months.
The labour ministry will also relax rules for accessing welfare payments such as child allowance and income support, removing means-testing rules for six months from April 1, and will protect tenants struggling to pay their rent from eviction.
