The Euro surged against the US dollar on Friday, in anticipation of a U-turn in German budgetary policy, which could end a decade-long zero-deficit policy.
European shares rebounded from a six-month low on Friday, as Germany’s Der Spiegel magazine said that the government was ready to ditch a budgetary surplus policy.
Germany’s debt-break law was introduced in 2009 and was enshrined into the constitution. It prohibits any government from increasing its structural deficit unless the country is facing a natural disaster or a severe recession.
The wisdom of this fiscal orthodoxy is increasingly called into question.
For example, the head of the IW Germany Economics institute, Michael Hüther, told Handelsblatt that the debt brake prevents tax cuts and public investment, limiting the country’s ability to respond to an economic downturn.
The time appears right for a policy change.
In 2009 Germany faced an €86bn deficit and the debt-to-GDP ratio stood at 80%. The debt limit allows Germany to borrow no more than 0,35% of its GDP the 16 federal states were required to bring their deficit to zero by 2020. Germany’s current debt-GDP ratio stands at just under 61% of GDP.
With German 10-year bonds offering negative yield – investors actually paying the security of German sovereign debt – the argument has been made that now is the time to invest in infrastructure and energy transition, boosting domestic demand as the global economy is slowing down.
In fact, the IMF points out that debt-funded investment under such circumstances could end up paying for itself, as it increases Germany’s growth. Even the German industrial federation (BDI) called last week for a stimulus package.
Last Tuesday Chancellor Angela Merkel made the case that Germany does not need a fiscal stimulus package to counter the effects of a slowing economy; however, she did add that the government was committed to a high level of public investment.
To date, according to a report by the KfW think-tank, the national debt brake is responsible for chronic underinvestment in towns and municipalities, to the tune of €138bn. With Europe’s largest economy on the brink of recession, Merkel faces pressure at home and abroad to invest.