Economy

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BERLIN (Reuters) – A new government beckons in Germany after the implosion of its ruling coalition, but it will face the same question: whether to allow higher public borrowing to prop up the flagging economy.Current polling suggests that, whatever the shape of that government, the conservative Christian Democrats (CDU) will be the largest party in it. That puts its leader, Friedrich Merz, in poll position to become chancellor.The following outlines Merz’s stance on Germany’s self-imposed borrowing limit, known as the “debt brake”, and the options he would have should he lead Germany’s next government.WHAT IS MERZ’S STANCE ON THE DEBT BRAKE?Merz has always said Germany should stick with the constitutionally enshrined debt brake, which limits public deficits to 0.35% of gross domestic product and was introduced by his party in 2009 under then Chancellor Angela Merkel. However, he has set two prerequisites for discussing a potential reform: having conditions for the money to be invested in pro-growth programs and controlling social welfare spending.”If we get the overall concept under control, then we can talk about reforming the debt brake, but not about abolishing it,” he said last week. WHAT IS THE VIEW WITHIN HIS CDU PARTY? Critics of the debt brake say it has held Germany back from investing in much-needed infrastructure improvements and contributed to its current economic decline.Within the CDU, the debate was reopened this year by Kai Wegner, the conservative mayor of Berlin. Several powerful CDU leaders from other regional governments have joined the push for reform because the states are also constrained by the debt brake.The CDU says it is not currently planning to change its position on the debt brake. But pressure is building within the party, with CDU state premiers pushing Merz to include reform plans in the election program in recent party meetings. WHAT IS THE POSITION OF THE OTHER PARTIES? Any change to the debt brake requires a two-thirds majority in the upper and lower houses of parliament. The pro-business Free Democrats of recently ousted finance minister Christian Lindner have always been fierce defenders of the debt brake. The far-right AfD, which is polling in second place after the CDU, also opposes any reform. Votes in favour of reform from the two parties in the now-minority government of the Social Democrats (SPD) and the Greens would not be enough. Germany’s new leftist populist party, the Sahra Wagenknecht Alliance (BSW), supports the reform.Together, these parties would have 64% of the votes, according to an INSA poll published on Saturday after the coalition break-up, being short of the two-thirds majority needed. If the CDU changes its line, that would be the decisive factor which tips the balance in favour of reform.WHAT ARE THE OTHER OPTIONS?One option is to suspend the debt brake citing special circumstances. Germany reimposed the debt brake in 2024 after four years in which it was suspended to allow extra spending due to the coronavirus pandemic and the energy crisis following Russia’s invasion of Ukraine.Another option would be off-budget funds to comply with the debt ceiling for financing Germany’s fiscal needs. Germany currently has 29 special funds at the federal level, worth a total of 869 billion euros ($925.75 billion) according to the independent auditing institution Bundesrechnungshof. However, a two-thirds majority would also be required to create one of these funds. ($1 = 0.9387 euros) More

“As we saw in the labour market data that was released this morning, pay growth remains quite sticky at elevated levels and levels that – given the outlook for productivity growth in the UK – are hard to reconcile with the UK inflation target,” Pill said at a conference organised by Swiss bank UBS.The BoE last week cut borrowing costs for only the second time since 2020 and said further reductions were likely to be gradual as it assessed the persistence of inflation pressures including from the first budget of Britain’s new government.Pill said Britain might be behind other economies in working its way through the impact of the COVID pandemic and other shocks in recent years, which could help to explain why investors are pricing higher UK interest rates than elsewhere.While it was not the BoE’s base case that Britain would need higher levels of rates to stabilise the economy, that possibility did need to be considered. “So (given) the fact that we are entertaining that story, it’s not surprising that markets are entertaining some of that story,” Pill said.Financial markets only price in 0.6 percentage points of interest rate cuts by the BoE by the end of next year, compared with 1.4 percentage points for the European Central Bank and 1.0 percentage points for the U.S. Federal Reserve.Pill voted last week with the majority of the BoE’s monetary policymakers to cut Bank Rate to 4.75% from 5% but has voted against lowering borrowing costs in other, closer decisions by the Monetary Policy Committee in recent months. More

U.S. President-elect Donald Trump has promised a big increase in trade barriers, including a 10% universal tariff on imports from all foreign countries and a 60% tariff on imports from China, with the aim of reducing the U.S. trade deficit. “What we do know is that the significant import duties spoken of could have detrimental ramifications for the world economy,” Finnish central bank chief Olli Rehn said in London. “A new trade war is the last thing we need amid today’s geopolitical rivalries – especially among allies.”Austrian central bank chief Robert Holzmann warned that these policies, if implemented, will keep U.S. interest rates and inflation higher, also putting upward pressure on prices elsewhere. “He means what he has said and he will probably implement it faster than we expect. If so, what do markets expect? … That interest rates will stay higher and that inflation will also be higher,” Holzmann said in Vienna, adding that would put upward pressure on the dollar and euro zone inflation. Holzmann argued that if the dollar firms and approaches parity against the euro, that would have a measurable impact on import costs, especially for energy, making it harder for the ECB to get to its 2% inflation target and potentially delaying the process.Trade tensions started to increase between the U.S. and Europe during Trump’s first presidency and Europe struggled to find a joint response, a mistake it should not make this time, Rehn said. “If a trade war were to start, Europe must not be unprepared, as it was in 2018,” Rehn added. “The (ECB) must, within its mandate, act as an anchor for economic and financial stability in this landscape of great challenges,” Rehn said. “No one should doubt that we will shoulder this responsibility in full.” More

Although Powell’s appointment does not end until 2026, media reports have suggested that some of Trump’s advisers are pushing for him to name a successor to the Fed Chair. This person would issue parallel statements, potentially persuading bond markets to take cues not from Powell and the Fed but from the incoming official, the Piper Sandler analysts said.”Presto, the White House can thereby wrestle away the transmission of monetary policy,” the analysts said in a note to clients.Last week, Powell flatly rejected notions that Trump could dismiss him from his post, telling reporters that he would not resign if asked to by the upcoming administration. Powell would also likely lodge a legal challenge to any attempt to oust him before his term comes to a close, the Wall Street Journal has reported.For his part, Trump has not recently indicated any plans to try to force out Powell, saying in June that he would allow Powell to serve out the remainder of his term “especially if I thought he was doing the right thing.” Trump’s advisers are split on how far he should take the matter, the WSJ reported.Bringing forth immediate changes at the Fed will likely be more complicated for Trump than in his previous four-year tenure in the White House, particularly as the institution does not have an open spot on its seven-person board.Meanwhile, any changes at the Fed may threaten to disrupt an ongoing bid by policymakers to defeat inflation without sparking a meltdown in the wider economy or labor demand. Last week, the Fed slashed rates by 25 basis points and said activity remains on a “solid pace,” although markets remain uncertain about the timeline for future reductions.Some analysts have speculated that Trump’s proposed policy changes, especially a blanket tariff on US imports, could drive up inflation and lead the Fed to leave rates at a higher level than initially anticipated. This uptick in volatility may exacerbate the possibility of a clash between the Fed and the new Trump administration, the WSJ said.Still, the Piper Sandler analysts say Trump “seems likely to play nice” regarding the Fed’s independence, arguing that leaving the central bank alone will be the “best and easiest option” for the president-elect to pursue his preference for low interest rates — especially if his policies expand the US federal deficit. A larger deficit could force the government to sell more bonds to finance its debt, possibly driving up overall borrowing costs.”If the new administration is, as everyone expects, unlikely to make a dent into deficits, then numerical inflation goals and central bank independence seem like effective offsets for keeping borrowing costs as low as possible,” the Piper Sandler analysts said. More

KYIV (Reuters) – Ukraine’s wartime government will boost domestic value-added production to reshape its commodities-driven economy, increase revenue, boost growth and return millions of Ukrainians home, the first deputy prime minister said.Yulia Svyrydenko, who is also the economy minister, told Reuters in an interview that the changes were needed for the country to recover, to rebuild after colossal damage from the war and to bring the economy closer to the European Union.”Our task is to support more Ukrainian production and also support the consumption of Ukrainian-produced goods,” the 38-year-old said in an interview. The government has already introduced a number of programmes offering grants and loans to small and medium-sized businesses, also to help companies relocate to safer areas and created dozens of industrial parks with specialized fiscal measures.”The task is to move away from the economy of raw materials and to build the economy that produces goods with added value. We face challenges to accelerate growth because we need to rebuild and also integrate into the European Union.”The government has raised its forecast for economic growth this year to 4% from the previous target of 3.5% due to better preparedness for energy sector challenges, Svyrydenko said.The government’s conservative scenario for 2025 envisages a 2.7% increase in GDP as the war, security risks, expected energy deficit and staff shortages will limit growth, she said.The central bank is more optimistic about 2025 economic prospects and forecasts 4.3-4.6% growth in 2025 and 2026.LOSSES MOUNT As the war with Russia approaches its 1,000-day mark, human, social, and economic losses mount. Svyrydenko said the government, the World Bank, and other partners were working on a new assessment of economic losses caused by the war.The latest available estimate showed that direct damage in Ukraine reached $152 billion as of December 2023, with housing, transport, commerce and industry, energy and agriculture as the most affected sectors. The total cost of reconstruction and recovery was estimated at $486 billion.”It is 2.8 times higher than our nominal GDP in 2023,” Svyrydenko said.Despite economic growth in 2023 and so far in 2024, the Ukrainian economy was still only at 78% of its size before the invasion in February 2022, Svyrydenko said.The key objective was to make the Ukrainian economy more self-sufficient. “From every hryvnia consumed in Ukraine, 40% is returning to the budget… and it is the issue not only of economic self-sufficiency but also our defence capacity,” she said.Ukraine spends the bulk of its state revenue to fund its defence efforts. Kyiv critically depends on financial aid from its allies to pay for social and humanitarian spending. Nearly $100 billion in Western economic aid has been received so far.Reduced electricity generation capacity after Russia’s intensified bombardments of the Ukrainian power sector has been a key challenge this year and going forward, Svyrydenko said.The government oversaw a massive repair campaign, agreed on higher electricity imports from Ukraine’s Western neighbours, and supported businesses in their steps to boost energy independence by simplifying regulations and allocating funds.Another difficult task was to return Ukrainians home, Svyrydenko said. Ukrainian businesses name labour shortages as one of their top problems as millions of Ukrainians are abroad and tens of thousands of Ukrainian men were mobilised.The government plans to set up a specialized agency to spearhead efforts to return Ukrainians home. For now, 4.1 million Ukrainians have been temporarily registered in Europe, official data showed.Svyrydenko said the government research showed that about 53% were ready to return once the security situation improved and also jobs and housing were available. More

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