Germany boosts investment to protect economy from virus hit

Bloomberg

German Chancellor Angela Merkel’s government will invest an additional 12.4 billion euros ($14.1 billion) between 2021 and 2024 and take its first steps to help companies and workers affected by the fallout from the coronavirus outbreak.
After more than seven hours of talks, Merkel’s coalition loosened rules for short-term work compensation. The changes will make it easier for companies heavily affected by the virus like Deutsche Lufthansa AG to apply for aid to offset wages when they are forced to temporarily halt work.
Pressure for Germany to act intensified in the days before leaders of Merkel’s Christian Democratic-led bloc and the Social Democrats met in the chancellery in Berlin. The death of the first German from the coronavirus, a 60-year-old man who vacationed in Egypt, added to the sense of urgency. While short of the full-blown stimulus package that many economists and investors have urged, the government sought to walk a fine line between reassuring business and avoiding public panic.
“The package is a good step in the right direction, but it will only tackle the impact from a short-lived economic shock,” said Carsten Brzeski, chief euro-region economist at ING Groep NV. “If Covid-19 spreads further and the economic impact worsens, last night’s move will not have been the final word.”
Finance Minister Olaf Scholz said on Monday it’s unclear whether virus will have long-term repercussions, but pledged that Germany is prepared “to do everything needed to stabilise the economy and secure jobs.”
“We will ensure that there is always enough liquidity,” Scholz said in an interview with DLF radio. “Our very solid state finances are the basis that will enable us to do everything necessary to cope with any genuine economic crisis.”
Merkel’s coalition didn’t agree on other measures like an accelerated phase out of the so-called solidarity tax, which helped pay for reunification, or an expansion of funds for state-backed loans and guarantees to ease a cash crunch for companies affected by supply and demand disruptions.
The clearest sign that the virus was hitting the German economy came, when Lufthansa slashed capacity by as much as 50%.
German companies cut spending for a third quarter at the end of 2019, leaving the economy vulnerable to supply chain havoc caused by the outbreak. Gross domestic product stagnated in the fourth quarter, slowing the annualised pace of growth to 0.3%.
While Germany has Europe’s fullest budget coffers, Merkel’s government has long resisted pressure from the European Central Bank and other institutions to unleash its fiscal power with spending that might benefit the region’s wider economy.
European finance ministers were warned that a prolonged coronavirus outbreak in the region could threaten “cascading effects” stemming from companies suffering squeezed liquidity, which could then be amplified by financial markets.
Eliminating the solidarity tax — a 5.5% surcharge on income — could shore up domestic demand. The tax, levied after the collapse of the Berlin Wall to help fund infrastructure in the former communist East, generated nearly 19 billion euros for German government in 2018. It’s due to be eliminated for 90% of taxpayers in a move set to take effect in 2021.
Scholz, a Social Democrat, had pushed for moving forward the reduction of the tax this summer. He told DLF his party will continue to work to persuade Merkel’s bloc to speed up the measure to boost consumer spending power.
Scholz has also championed a plan to take on 42 billion euros of debt from cash-strapped communities in an effort to divert local coffers to infrastructure projects, such as school and road repairs.
“I will make a proposal this month on how we can ease the debt burden for more than 2,000 municipalities,” Scholz said on Monday. “Then there will be an investment program across the whole public sector, and I believe that will bring great progress for Germany that we’ll be able to see, for example, in better schools and roads.”

Merkel’s CDU had previously ruled out a more sweeping stimulus package to stem the damage wrought by the virus outbreak, arguing that a surge in public spending won’t address worries among consumers and investors.
That flew in the face of growing calls by industry groups for more action. The country’s influential industry federation BDI on Thursday warned of a recession and urged the government to consider stimulus measures.
CDU leader Annegret Kramp-Karrenbauer said in a television interview Monday that it’s sensible for Germany to maintain “room for maneuver” in the budget to be able to cope with whatever challenges the economy faces in coming months.
The meeting was overshadowed by the refugee crisis at the Greek-Turkish border and a conflict between Merkel’s CDU-led conservative bloc and the Social Democrats over the question of whether Germany should let some of the refugees into the country. The government agreed to help between 1,000 and 1,500 children who need medical treatment in the context of a European “coalition of the willing.”