Germany borrows $34b more this year to pay for stimulus

Bloomberg

German Finance Minister Olaf Scholz is planning to raise more debt this year and next to help pay for the government’s massive stimulus program.
Scholz will propose to raise debt by at least 30 billion euros ($33.9 billion) in a supplement to this year’s budget that will require parliamentary approval, according to people familiar with the discussion. Further borrowing will be necessary next year as well to help offset weaker tax revenues and pay for growth measures, said the people, asking not to be named because the plans aren’t public.
Chancellor Angela Merkel’s coalition agreed this week on a sweeping 130 billion-euro stimulus package to spur short-term consumer spending, and get businesses to invest again.
Scholz has been trying to downplay concerns by Merkel’s ruling Christian Democratic party over the amount of debt the rescue plan will generate. On June 4 he said that financing needs are manageable and that the government can fall back on a surplus fund of 40 billion euros as well as debt authorised in March but not yet fully used.
Still, Germany’s new borrowing requirements mark an extraordinary about-turn from years of fiscal discipline that produced balanced budgets.
In March parliament had already approved extra debt of 156 billion euros as part of a supplementary budget request.
The new borrowing requirements had previously been reported by Spiegel news magazine, which said that the government’s overall new debt this year would rise to more than 180 billion euros.

German economy set to shrink 7% in 2020
The German economy has passed the trough of its coronavirus recession and is starting to grow again, the Bundesbank said, endorsing the government’s sweeping fiscal stimulus that should underpin the rebound.
Yet the recovery is still muted as some restrictions to rein in the spread of the pandemic remain in place, the institution cautioned in its twice-annual economic projections. Output this year is forecast to shrink 7.1%, before bouncing back in the subsequent two years.
To help the economy come back to life, Chancellor Angela Merkel this week unveiled a 130 billion-euro ($148) plan focused on fueling consumption and infrastructure investment, taking total spending to more than 1.3 trillion euros, by far the most in the European Union.
“Public finances are making a significant contribution to stabilizing the economy,” Bundesbank President Jens Weidmann said in a statement. “Additional stimulus is appropriate in the current situation and I welcome the package.”
While Germany is facing a record slump, it’s still faring better than many other countries. Economists see Italy shrinking more than 10% this year, while Spain and France will contract about 9%.
The Bundesbank’s latest projections don’t factor in the impact of the latest dose of fiscal aid, but the institution estimates it could boost GDP by more than 1 percentage point this year.
The European Central Bank also added some support on Thursday with another 600 billion euros in asset purchases that will stretch to the middle of next year. Despite those efforts, it sees the 19-nation euro economy shrinking 8.7% in 2020.
In April, German factories experienced a record decline in demand, underscoring the brutal hit Europe’s largest economy sustained from the shuttering of businesses to rein in the pandemic. Producers of investment goods suffered particularly, with orders plummeting more than 30%.
The Bundesbank cautioned that the economic situation remains highly uncertain and presented two alternative scenarios for how the outlook could develop. Under the negative one, which assumes infections will flare up again, the economy could contract by as much as 10%.
More than 600,000 people have already lost their jobs, and the Ifo institute estimates that some 7 million more are on temporary state-wage support. While the Bundesbank sees unemployment rising, it doesn’t expect any large-scale damage to the labor market.