Anyone hoping Germany’s climate change plan would tip a willingness on the part of Berlin to abandon the country’s “black zero” fiscal policy was disappointed on Friday.
Long story short, the climate initiative will not entail raising additional debt and therefore will not impact the government’s budget. Rather, Germany will stick to its fiscal guns. Money raised from carbon certificates (along with higher taxes on flights and conventional cars) will apparently be used to fund incentives for electric vehicles and grants for the installation of new furnaces. Berlin plans to issue green bonds “in the future”.
For months, analysts and economists have suggested Germany should take advantage of absurdly low rates to fund stimulus amid a deep manufacturing slump that appears poised to drag the world’s fourth-largest economy into recession as soon as this quarter.
Despite the economic malaise, Germany has stubbornly refused to countenance the idea of deficit spending, even as finance minister Olaf Scholz said the government would step in should the situation deteriorate into a “crisis”.
The €54 billion climate package was the product of “more than 16 hours of overnight negotiations that began Thursday evening in Berlin”, Bloomberg notes. Germany will spend “3-digit billion euros” over the next decade on the plan.
30-year German yields turned negative, flattening the 5s30s, as it became apparent the plan doesn’t effectively signal capitulation to calls for fiscal spending. The euro slumped.
“[Merkel’s comments] look out of step with the ‘fiscal, fiscal, fiscal’ message from ECB policy makers”, one FX strategist said Friday, a reference to Mario Draghi’s call, at the September ECB press conference, for governments with spending capacity to step up to the plate.
“While we expect [the climate package] to entail some easing, it is likely to fall short of the stimulus envisioned by ECB officials who are urging fiscal authorities to use their available space more aggressively”, Goldman wrote, in a note dated Friday.
The bank went on to say that while they’re looking for fiscal easing of around 0.3% of GDP in 2020, there’s “considerable space for more accommodative policy within the existing fiscal framework”. Goldman presents a four-point rationale for that claim involving reserves set aside for special purposes outside of the main budget, the running down to zero of projected state and local government surpluses, the leeway built into the debt brake that permits small deficits and the “natural disasters/emergencies” provision.
“The debt brake rule caters for exceptions on account of natural disasters or economic emergencies, which warrant a larger deficit than in normal times [and] the Bundestag can trigger such an exception with a simple majority”, Goldman writes, on the way to assessing that a €50 billion stimulus package (Scholz has mentioned that figure on several occasions) would “amount to around 1.4% of 2020 GDP” which the bank notes is “well within the 3% deficit limit set by the EU’s Stability and Growth Pact”.
Whether or not Germany will abandon its borderline fanatical commitment to a strict interpretation of fiscal rectitude remains to be seen.
So far, the 2019 experience indicates that a manufacturing recession isn’t sufficient to override the religious adherence to the sacred “black zero”.
Maybe an outright, broad-based downturn would be more compelling.