Germany to increase debt to tackle virus

Germany must take on yet more debt in 2021 to lessen the impact of the coronavirus on the economy, Finance Minister Olaf Scholz said on Friday, August 21.

“Next year, we will continue to be forced to suspend the debt rule and spend considerable funds to protect the health of citizens and stabilize the economy,” Scholz said in an interview with the Funke media group, referring to Germany’s cherished policy of keeping a strictly balanced budget.

Scholz already plans to borrow around 218 billion euros ($258 billion) this year to help pay for a huge rescue package, which he previously described as a big “bazooka,” to steer the country through the coronavirus-induced downturn.

That decision marked a momentous change in the attitude to state borrowing in a country that amended its constitution in 2009 to rein in spending with a so-called debt brake.

The rule, introduced at the height of the financial crisis, bans Berlin from taking on more than the equivalent of 0.35% of gross domestic product (GDP) in new debt in any one year in normal times.

Despite a weaker economic environment, the German government posted a record 13.5-billion-euro budget surplus in 2019.

The surplus renewed criticism of Chancellor Angela Merkel’s fiscal policies. 

The European Commission and the International Monetary Fund have long argued that Germany’s tight purse strings have caused imbalances in neighboring economies and hindered stimulating growth in Europe overall.

‘Paying off’

But the pandemic emergency has prompted Berlin to open the money taps like never before.

Merkel’s government has pledged over a trillion euros in aid to shield companies and citizens in Europe’s top economy from the virus fallout, including through loans, grants, and subsidized shorter-hours programs.

Scholz, also the vice chancellor of Germany, said he was expecting the economy to have recovered from the shock and returned to pre-pandemic levels “by the end of next year or the beginning of 2022.”

When asked how the debt would be paid down, Scholz lauded  the performance of the German economy and the years of rigorous budget management before the crisis struck. 

“This is paying off right now, with our ‘bazooka’ we are going flat out.”  

However, Wolfgang Steiger, secretary general of the economic council for Merkel’s conservative CDU party, urged caution.

“Reckless new debt and a permanent easing of the debt brake would be an attack on the future viability of Germany as a business location and on the future of the young generation, which will have to pay back all the debt at some point.”

Germany’s center-left Social Democrats (SPD) have nominated Scholz to lead them in the race to succeed Merkel as chancellor in next year’s federal election. 

Buoyed by his handling of the coronavirus pandemic, Scholz is now the SPD’s most popular politician, according to national polls.

Europe’s top economy was hit less hard by the coronavirus than its neighbors, but still saw its GDP fall by 10.1% in the 2nd quarter after a decline of 2% in the 1st. 

Germany’s previous record for a quarterly GDP drop was 4.7% in the 1st quarter of 2009, after the financial crisis of 2008. – Rappler.com