Germany’s Scholz seeks $62bn aid program for municipalities

Bloomberg

German Finance Minister Olaf Scholz is planning a 57 billion-euro ($62 billion) aid package to help municipalities being hit by the economic fallout from the coronavirus pandemic, a person familiar with the matter said.
The plan, which Scholz announced on Saturday without giving the size of the measures, would help local governments cover outstanding debt and tax shortfalls caused by the pandemic and assist the economic recovery, the person said, asking not to be identified as the information isn’t public.
The news comes as Germany considers stepping up borrowing to fund stimulus measures that could push public debt in Europe’s biggest economy above 80% of gross domestic product, according to a senior Finance Ministry official.
That would be up from about 60% currently and more than the 75% forecast by Deputy Finance Minister Joerg Kukies. The country has leeway to go up to 80%.
The government and parliament have used emergency powers to raise constitutional debt limits and pass a budget plan for new borrowing of 156 billion euros this year. The administration is planning another supplementary budget of 100 billion euros or more, Der Spiegel reported.
Chancellor Angela Merkel’s ruling coalition has said it will present details on a new stimulus package in early June. Her coalition is seeking to limit extra government spending and is opposed to Scholz’s plan to cover the debt of municipalities.
The German economy shrank 2.2% in the first quarter, the most in more than a decade, official numbers showed earlier. The government expects the economy to contract 6.3% this year.

Germany’s economy shrinks the most in more than a decade
A revision to Germany’s fourth-quarter performance means Europe’s largest economy is already in a recession. With restrictions to contain the pandemic only slowly being lifted, the economy is set to suffer much more in the three months through June.
The euro and German bunds barely reacted to the data. The single currency is trading little changed from the previous day.
The German government has already mobilised some 1.2 trillion euros ($1.3 trillion) to support German businesses, and is working on additional tools to kickstart the economy. More than 370,000 people lost their jobs in April alone, and a program where the state compensates large parts of wages lost when businesses cut workers’ hours has received applications for more than 10 million staff.
Scholz has promised a stimulus program in early June that will focus on investing in a “modern and climate friendly future.”
The Italian government passed a stimulus package worth 55 billion euros this week to try to prop up the economy, after a previous 25 billion-euro plan in March was deemed insufficient. The decline in industrial sales and orders in the country exceeded 25% in March.
Even though the situation is dire, Germany isn’t faring as poorly as much of the rest of the euro area. France, Italy and Spain have all registered first-quarter contractions of around 5%. The Dutch economy shrank 1.7%.
That’s partly because German containment measures were comparatively light and only took effect on March 23, later than in other countries. There’s also the economy’s reliance on manufacturing and trade, sectors that have been weathering the crisis slightly better than the services and tourism industries that are dominant in Europe’s south.
Projections for Germany — as well as the euro area — are highly uncertain and largely depend on how the outbreak develops. The region’s largest economy is on track for its worst recession since World War II, with the European Commission predicting a decline in output of 6.5% this year.