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World

Germany should extend halt of debt limit rule: Merkel ally

  • The German economy suffered its biggest contraction in 2020 since the 2009 financial crash as it was hard hit by unprecedented restrictions imposed to halt the coronavirus.
Published January 26, 2021

BERLIN: The coronavirus pandemic has forced Germany to put on hold its cherished fiscal discipline, with Europe's economic powerhouse expected to take on massive new debt in the coming years to bankroll its recovery.

Germany's so-called "debt brake" is a constitutionally enshrined rule that forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

With the economy sinking into a deep recession as entire sectors are idled to halt Covid-19 transmission, Chancellor Angela Merkel has stepped in with a trillion euros in aid and stimulus to tide companies and employees through.

To fund the help, Germany was forced to lift its "debt brake" for 2020 and 2021.

On Tuesday, Helge Braun, chief of staff at the chancellery, acknowledged that it will take a few more years before Germany can report a balanced budget again.

"The 'debt brake' cannot be complied with in the coming years, even with strict spending discipline," Braun wrote in a commentary for the Handelsblatt business daily.

It would "make sense to combine a recovery strategy for the economy in Germany with a change in the Basic Law", he said, referring to the constitution.

The amendment should prescribe a gradual return to compliance with the debt rule "with a clear date", he said.

The move is necessary and should be viewed as a "strategic decision for economic recovery," added Braun, who is a close ally of Merkel.

By offering more flexibility on debt, the government would be able to hold off on hikes in taxes or social charges.

Braun stressed however that Europe's biggest economy must return gradually to its limits on new debt in a few years' time, once recovery is on track.

But his call was immediately rejected by powerful voices in Merkel's conservative CDU-CSU alliance.

Markus Soeder, who heads the CSU, said he was "sceptical" about Braun's suggestion.

"We cannot solve the economic consequences of the pandemic in the long term with higher debt or higher taxes," he told Die Welt daily.

"A coherent economic concept is needed. Germany stands for financial seriousness and we should stay that way," added Soeder, who has been touted as a possible successor of Merkel in Germany's top job.

"Solid public finances are non-negotiable for the Union parliamentary group," said Eckhardt Rehberg, the spokesman on budgetary matters for CDU-CSU lawmakers.

Rejecting Braun's suggestion as his "own personal opinion," Rehberg said his group "stands firmly by the debt break in the Basic Law."

The German economy suffered its biggest contraction in 2020 since the 2009 financial crash as it was hard hit by unprecedented restrictions imposed to halt the coronavirus.

Earlier predictions had expected a return to growth in 2021 after output shrank 5.0 percent but clouds are darkening as the virus has shown no signs of loosening its deadly grip on Europe.

A new round of shutdowns of restaurants, sporting and leisuire facilities first imposed in November and then expanded to include schools and most shops in mid-December is now due to run to mid-February.

But with virus variants first seen in Britain and South Africa that are feared to be more contagious, Merkel's government has warned that easing restrictions too early could lead to a rapid flare-up in infections.

Economy Minister Peter Altmaier is due to present on Wednesday the latest growth forecasts for 2021, with local media reporting that the expected 4.4 percent gain for this year may be shaved to 3.0 percent.

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