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ECONOMY

Germany to borrow €218.5 billion to fund coronavirus stimulus

The German government plans to take on €218.5 billion in new debt this year to pay for massive stimulus to help the country recover from the coronavirus impact, finance ministry sources said Monday.

Published: 15 June 2020 17:12 CEST
Germany to borrow €218.5 billion to fund coronavirus stimulus
Olaf Scholz speaking at a press conference in Berlin on Friday. Photo: DPA

The new borrowing marks a watershed for Chancellor Angela Merkel's government, which has long prided itself on fiscal discipline and balanced budgets.

But the coronavirus has forced a major U-turn in Europe's top economy, with
the government agreeing in March to lift a constitutional “debt brake” to help
the country weather its worst recession since the end of World War II.

Finance Minister Olaf Scholz is set to unveil Berlin's second supplementary
federal budget on Wednesday, officials in the finance ministry told AFP.

READ ALSO: Coronavirus in Germany: Who will receive financial help – and how much?

The budget will include €62.5 billion in new debt and will come on top of €156 billion of new borrowing already approved by Merkel's cabinet in March.

That would bring new borrowing to €218.5 billion this year and lift Germany's overall debt burden to around 77 percent of gross domestic product — well above the European Union's 60 percent ceiling.

The extra money would be used to cover the government's coronavirus stimulus spending and make up for lower tax intakes as companies and employees grapple with the fallout from lockdown measures that choked off economic activity.

The new debt “is part of a fiscal policy aimed at overcoming the crisis”, a finance ministry source told AFP.

“It's money well spent,” the source added. “Today's debt is tomorrow's tax revenue.”

The government, which has run a federal budget surplus since 2014 and for years ignored calls to spend and invest more, stunned observers in March when it unveiled a €1.1 trillion coronavirus rescue package.

The package, which includes cash injections, loan guarantees and a beefed-up shorter hours scheme, was aimed at safeguarding companies and jobs as the crisis hit.

As Germany emerges from lockdown and the virus outbreak appears to be under control, the government went a step further and earlier this month announced
an additional €130 billion stimulus package to jumpstart the battered economy.

It includes a reduced sales tax, a €300 bonus per child for families and higher rebates for electric vehicles, all part of a push to get Germans shopping again.

The government has said it expects the German economy to shrink by a record
6.3 percent in 2020 before bouncing back to growth in 2021.

READ ALSO: Here's when families will receive Germany's Kinderbonus cash

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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