Germany plans to borrow extra $43 billion to cushion war blow

Bloomberg

Germany will increase borrowing plans by nearly 40 billion euros ($43 billion) this year to cushion the effect of the war in Ukraine, taking the total for net new debt to almost 140 billion euros, according to three people familiar with the matter.
The adjustment is needed to help finance a range of government measures designed to offset the economic impact of the war and surging energy prices on companies and consumers, said the people, speaking on condition of anonymity before the fiscal plan is presented to the cabinet on Wednesday.
The proposal by Finance Minister Christian Lindner will then be sent to parliament for
approval.
Since the start of the coronavirus pandemic, the German government has broken long-standing fiscal taboos and unleashed an unprecedented borrowing binge with net new debt of 130 billion euros in 2020 and a record 215 billion euros in 2021.
The ruling coalition has suspended constitutional rules limiting new debt for three consecutive years to deal with the economic fallout from the pandemic but is standing by a pledge to restore them in 2023 — at least for the time being.
Chancellor Olaf Scholz has also announced a special off-budget fund worth 100 billion euros to pay for a huge increase in military spending and meet the Nato alliance’s military spending goal of 2% of economic output per year. Lindner has said that borrowing to finance the fund will be spread over several years.
This means overall net new borrowing is likely to exceed 140 billion euros at the end of this year, depending how much debt from the 100 billion euros of the special fund will be booked in 2022.

German economy at
risk of shrinking
The German economy is at risk of shrinking nearly 2% this year if the war in Ukraine escalates and an embargo on Russian coal, oil and gas leads to restrictions on power providers and industry, according to the Bundesbank.
The estimate translates into a hit to output of about 5 percentage points compared to a March baseline, Germany’s central bank said in its monthly report.
While losses in the following years should be somewhat smaller, particularly if Russian energy deliveries are gradually substituted and rationing effects ease, activity in 2024 would still be significantly below previously forecast levels.
Economists have struggled in the past weeks to come up with estimates of the economic fallout of the war for Europe. Risks are high that Russian’s escalation of its attack on Ukraine will trigger aggravated sanctions and counter-sanctions, with a complete ban on energy having the biggest impact on growth.
Research institutes advising the German government said last week that such a step would cost Europe’s largest economy some $239 billion, the equivalent of 6.5% of annual output, over the next two years.
The Bundesbank calculates that losses amount to 165 billion euros this year and 115 billion euros in each of the following ones. Only the 2022 forecast
includes rationing effects.
The central bank estimates that the worst damages will come from higher commodity costs. It said the findings of its two main models complement each other in the short term so that their findings can be added up to show the war’s full impact.
The Bundesbank said the German economy “more or less stagnated” in the first quarter, adding that the economic implications of the war in Ukraine are uncertain and depend on how the situation evolves.