Germany wields the bazooka in fight against coronavirus
Germany said it was pledging unlimited cash to businesses hit by the coronavirus, in what finance minister Olaf Scholz described as a big “bazooka” to avert a crisis in the eurozone’s largest economy.
The move represents an abrupt volte-face for a government that for years has been wedded to the ideology of balanced budgets and no new borrowing, and has long resisted calls from international organisations like the IMF to loosen the purse strings.
But it also reflects the enormity of the challenge coronavirus poses for an export-oriented economy like Germany’s that is so heavily reliant on global supply chains and the free flow of trade.
The package unveiled on Friday envisages a massive expansion of the loans provided to companies by KfW, the state development bank. Companies will also be allowed to defer billions of euros in tax payments.
“This is the bazooka, and we will use it to do whatever it takes,” Mr Scholz told reporters in Berlin. He said there was “no upper limit on the amount of loans KfW can issue”.
Mr Scholz said Germany was facing a “very grave situation” that was already having a marked impact on companies. A sharp decline in travel was hitting the logistics and hospitality sectors, trade and tourism, while local industrial production was being affected by disruptions to supply chains and a decline in foreign demand.
He said the measures he and economy minister Peter Altmaier were announcing would provide a “protective shield” for workers and companies, and ensure that they weathered the crisis.
Germany was only able to take such wide-ranging measures because of its “very good, stable public finances, which are an example to the world”. The country has run budget surpluses since 2014, and last year’s amounted to €50bn.
The German budget currently guarantees KfW a financial framework of €460bn, but officials said this could easily be raised by €93bn, giving the bank more than €500bn in available firepower.
Asked if this marked the end of the government’s self-imposed ban on new borrowing, the so-called “black zero” policy, Mr Scholz said: “It is not completely implausible that we will need additional money.”
He also said that Germany may need to adopt a fiscal stimulus programme, though this was not currently necessary.
The reaction from experts was positive. Clemens Fuest, head of the Ifo think-tank in Munich, said a fiscal stimulus would be inappropriate at a time when the government was trying to curb “social consumption” and to temporarily freeze economic activity.
“Economic policy must prevent this freezing from leading to permanent damage,” he said. The package of measures unveiled by the government “is focused on supporting companies affected and their workers during this freezing phase”. “The fact that this aid is unlimited is the right signal for stabilising expectations,” he said.
Germany’s dramatic move came as the European Commission offered a bleak assessment of the economic damage from the coronavirus crisis and vowed to give member states ample leeway to ramp up spending in response.
Unveiling a package of support measures on Friday, the commission warned that output in the EU and eurozone could be driven into negative territory this year, adding that the virus could have a “very large detrimental economic impact”.
The direct impact of the crisis could lead to a 1 per cent contraction in gross domestic product in 2020, with a “substantial but not complete” rebound in 2021. That compares with a prior prediction of 1.4 per cent EU growth this year.
Ursula von der Leyen, the commission president, warned that the crisis represented a “major shock” to EU economies and said the bloc’s response needed to be determined, co-ordinated and united.
Under its proposals countries will be able to approve rapid support for struggling companies that are directly affected by the “serious disturbance” triggered by the global pandemic.
The commission will additionally mobilise €37bn under its regional funding programmes to combat the impact of the virus — a larger number than previously announced by Ms Von der Leyen.
Commission executive vice-president Valdis Dombrovskis said the EU would now deploy the “full flexibility” in its fiscal rules to allow countries to boost spending.
The commission “stands ready” to trigger a special general escape clause from its budget rules if the regional downturn became severe enough, he added, although this step was not yet being taken.