Germany Says It Can Boost Spending Without Easing Debt Rules

(Bloomberg) -- Germany has enough spending flexibility to react to economic crises without changing constitutional deficit limits, the finance ministry said.

Handelsblatt newspaper reported earlier that ministry officials are exploring ways of loosening borrowing rules -- enshrined in the so-called “debt brake” -- in a move that could pave the way for higher spending to boost Europe's biggest economy.

Asked about the report, the ministry said Finance Minister Olaf Scholz is a “big supporter” of the debt brake and has repeatedly indicated he will stand by it. Scholz has also signaled that Germany has plenty of spending power to react if the spread of the coronavirus severely impacts the economy, the ministry added.

The debt brake “provides the necessary room for maneuver on debt for effective action in times of crisis,” a ministry spokeswoman said by email. “There is therefore still no need for any change.”

Read more: The Plot to Scrap Germany's Balanced Budgets Has Already Begun

Discussions around a boost in German spending have gathered pace in recent months after the economy narrowly avoided recession last year. Growth has been hampered by a series of challenges, from trade woes to Brexit to pressure on the auto industry to adapt to electric vehicles. The coronavirus outbreak adds a new risk to the export-driven economy.

“Right now, it's the uncertainty that is causing the most damage to German industry,” Economy Minister Peter Altmaier said in an interview with ARD television Monday. “We must not allow this virus to infect the recovery,” he said, adding that he will discuss possible stimulus measures with Scholz.

Leading ministry officials, including Chief Economist Jakob von Weizsaecker, are looking at adjusting the debt brake to European levels, Handelsblatt reported, without saying where it obtained the information.

The move would mean the federal government could increase the annual deficit from 0.35% of gross domestic product to as much as 1%, the equivalent of around 35 billion euros ($39 billion) in extra spending, according to the paper.

An official familiar with Scholz's plans said last week that he is considering a move that could open an avenue for limited fiscal stimulus by temporarily suspending rules that restrict debt levels in order to provide relief for indebted regions.

The initiative would shift borrowing from municipalities to the federal government, giving them more budget space to invest locally.

Deficit spending is a politically sensitive topic in Germany and faces heavy resistance, especially from Chancellor Angela Merkel's Christian Democrats and their Bavarian allies in the CSU.

Because of this, officials at the finance ministry -- run by Scholz, who's a Social Democrat -- are considering options to circumvent a direct change to the rule, such as getting a public company or a special investment fund to do the borrowing, Handelsblatt reported.

--With assistance from Mariajose Vera.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Iain Rogers

©2020 Bloomberg L.P.