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Germany’s finance minister eyes plan to ease strict ‘debt brake’

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Via Financial Times

Germany’s finance minister is eyeing a suspension of the country’s curb on taking on new debts, in what would be a big shift in fiscal orthodoxy in the eurozone’s largest economy.

Olaf Scholz wants to help 2,500 cash-strapped towns and cities that are struggling to service their debt piles. According to an official familiar with his thinking, he is looking to do this by temporarily lifting Germany’s “debt brake” — a restriction enshrined in the constitution that limits Berlin’s ability to run budget deficits.

Germany’s strict fiscal discipline has delivered a string of budget surpluses but a chorus of economists, business leaders and politicians argue that Angela Merkel’s government should take advantage of historically low interest rates to loosen the purse strings and boost investment.

Calls for higher spending have grown louder as the prospects for the eurozone darken. Data published this month showed the economy of the single currency area growing at its slowest rate since the bloc’s debt crisis seven years ago.

There are also mounting concerns about potential economic disruption from the coronavirus outbreak in China, which is already having an impact on manufacturing supply chains, exports and travel.

Easing the constitutional debt brake would allow the government to take over the municipalities’ borrowing and give them greater freedom to invest in schools, roads and hospitals.

Christine Lagarde, head of the ECB, praised Mr Scholz’s initiative on Wednesday, telling Bloomberg that “any fiscal measures intended to support the economy are certainly very welcome, particularly under present circumstances”.

“If that has the characteristic of fiscal support and the encouragement to the economy, that’s welcome,” she added.

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However changing or suspending the debt brake could prove difficult. An amendment to the constitution requires a two-thirds majority in both houses of the German parliament.

Mr Scholz, a social democrat, is also unlikely to overcome resistance to his proposal from Ms Merkel’s Christian Democratic Union, senior partner in Germany’s governing grand coalition.

Eckhardt Rehberg, the CDU’s senior spokesman on budgetary matters, accused Mr Scholz of “trampling on the constitution”. “You cannot just suspend the debt brake whenever you feel like it, just as you cannot suspend fundamental rights,” he said.

Hans Michelbach of the CSU, the CDU’s Bavarian sister party, said the Social Democrats were trying to turn Germany back into a “debtor country”.

He said that Germany’s constitution made the country’s 16 regions responsible for ensuring municipalities were adequately financed. “I do not understand why some regions should be rewarded with federal funds for neglecting their constitutional duties,” he said.

But Mr Scholz’s plan was welcomed by some economists. Marcel Fratzscher, head of the DIW think-tank, said it would “create fiscal space for municipalities to build up capacity and raise long-run investment”.

The finance ministry declined to comment, saying only that Mr Scholz would present his proposals for regulating municipalities’ debts in the first part of this year. The ministry was “currently working on a concept and discussing various options,” she said.

The debt brake allows Germany’s government to take out new loans up to the value of just 0.35 per cent of gross domestic product, adjusted for the economic cycle. It was introduced in 2009 to restrain public debt in the wake of the global financial crisis and at a time when concerns about the demographic pressures on Germany’s welfare state were growing.

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In its annual assessment of the German economy, published on Wednesday, the European Commission said Berlin had made “limited progress” on improving investment in education, digitalisation, sustainable transport and affordable housing, and said expanding public investment would “boost output and employment in both Germany and the rest of the euro area”.

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