Germany frets about its coronavirus debt mountain

Financial Times
Many on right seek return to fiscal rectitude, while left worries about spending cuts

German finance minister Olaf Scholz said on Friday: ‘One shudders to think what would have happened here if we hadn’t invested such big sums’ © Kay Nietfeld/dpa

German finance minister Olaf Scholz said on Friday: ‘One shudders to think what would have happened here if we hadn’t invested such big sums’ © Kay Nietfeld/dpa

When coronavirus hit, Germany splashed out on Europe’s most generous package of emergency aid. Now, for the first time since the start of the pandemic, politicians are asking whether the country can actually afford such largesse.

The debate was stirred by last week’s consultations on the 2021 budget. Olaf Scholz, finance minister, shocked MPs by nearly doubling the amount of new borrowing to €180bn. That comes on top of the €218bn of debt Germany is taking on in 2020, the largest amount in its postwar history.

Mr Scholz is unrepentant. “One shudders to think what would have happened here if we hadn’t invested such big sums,” he said on Friday. “Timidity would cost us too dear.”

The expansion in debt is “threatening to become a crisis of the next generation”, said Karsten Klein, an MP with the pro-business Free Democratic party.

For a country that once prided itself on its balanced budgets, the sums are indeed eye-watering. Yet it was clear from the start that the policy of schwarze Null or “black zero” would never survive the coronavirus crisis.

So when the pandemic arrived, Mr Scholz quickly wheeled out his “bazooka” — a €1.3tn programme of subsidies and grants to businesses, supplemented in June with a €130bn stimulus package. He also suspended the “debt brake”, a measure enshrined in the German constitution which limits the budget deficit to just 0.35 per cent of gross domestic product.

Some in the opposition say that Mr Scholz’s motivation in opening the spigots is to improve his chances in next year’s Bundestag election, where he is running as the Social Democrats’ candidate for chancellor.

“The constitution doesn’t say that in an emergency you can spend whatever you want,” said Otto Fricke, an FDP MP and member of the Bundestag’s budget committee. “When in doubt, taxpayers’ money should always be spent cautiously and providently.”

The government insists the surge in spending is a temporary aberration, and normal service will be resumed once the pandemic is over. Germany will, it says, start paying off the pandemic-era debts in 2023, and the debt brake will be restored in 2022.

For some in Ms Merkel’s CDU/CSU bloc, a return to the path of fiscal rectitude cannot come soon enough. “At the moment, politicians are saying: ‘If we’re taking on so much debt anyway, then that means I can squeeze my little project into the budget too’,” said one senior Christian Democrat MP. “That’s why we urgently need to return to budgetary discipline soon.”

But many think reinstating the debt brake in 2022 is unfeasible. Gesine Lötzsch, an MP for the hard-left Die Linke, said the idea is “absolutely absurd”. “No one really believes it [will happen],” she said.

Black Friday shoppers in Bonn. The government is insisting on a swift return to the fiscally prudent policies of the past, but opposition MPs give those assurances little credence © Andreas Rentz/Getty

Even in the CDU/CSU group, there is scepticism. “You would have to reduce borrowing from €180bn next year to €10bn in 2022 — the maximum allowed under the debt brake,” said one adviser. “That’s insane. There’s never been such a radical fiscal consolidation in this country.”

The CDU/CSU has ruled out hiking taxes to restore the public finances. That leaves spending cuts — an option the left strongly opposes. “We need binding political guarantees that . . . Germany doesn’t return to harsh austerity policies after the corona crisis,” said Sven-Christian Kindler, a Green MP. “After the bazooka we can’t have a wrecking ball.”

For that reason, many expect the debt brake will have to be modified or even abolished altogether — a move that requires a change to the German constitution. Such an outcome will be more likely if the Greens, who have been highly critical of such strict fiscal rules, enter government after next year’s election, as seems increasingly likely.

Mr Scholz has insisted that Germany’s public finances will survive the rise in spending during the pandemic. The country’s debt-to-GDP ratio will be just 71 per cent by the end of this year — admittedly much higher than the 60 per cent it reached in mid-2020, but “lower than it was after the [global financial] crisis, and the lowest [rate] among all the G7 states,” he said.

He also noted that much of the €218bn in new borrowing for 2020 had not yet been tapped, so that taken together, the total amount of debt for this year and next will be around €300bn.

That has not silenced the critics, who have drawn attention to what they see as serious design flaws in some of the biggest aid programmes. After the government imposed a partial shutdown in November, it said it would pay restaurants, bars and hotels 75 per cent of the revenues they made in November 2019. The scheme was rolled over when ministers extended the shutdown into December.

But a recent study by the German Economic Institute in Cologne (IW) concluded that the €30bn programme was far too generous. Many businesses were making more money than they did normally because it did not factor in the sharp drop in variable costs they were seeing while their doors were closed.

“To refund most of a business’s revenues is neither clever nor fiscally sustainable,” said Carsten Linnemann, a senior CDU MP, adding that only a company’s fixed costs and living expenses should be reimbursed. “We have to think long-term — future generations also need room for manoeuvre.”

Ministers have now indicated that the scheme will not be extended into 2021. “By January we have to draw up more pinpointed aid programmes,” Helge Braun, Ms Merkel’s chief of staff, told Handelsblatt. “The state can act — but not in a limitless way.”

The government is insisting on a swift return to the fiscally prudent policies of the past. But opposition MPs give those assurances little credence. “When you’ve ramped up borrowing in an emergency, it’s incredibly difficult for the state to bring it down again,” said the FDP’s Mr Fricke. “Unfortunately you can just get used to debt.”

Financial Times

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