COVID and climate change worsen Germany’s financial outlook

One of the first official acts of the new German finance minister, Christian Lindner, was something of a turnaround. Five days after being sworn in, Lindner – the chairman of the neoliberal Free Democrats (FDP) – presented a supplementary budget bill to parliament that a few months earlier, while still in opposition, he allegedly lambasted as totally unfounded. Now he has offered to transfer what remains of the pandemic loans in 2021 to invest in climate protection.

A total of 240 billion euros ($ 270 billion) of credit had been approved for hardship loans, and around 60 million euros remain, which Lindner wants to transfer to the Energy and Climate Fund. . This money must help “the transformation of one of the largest industrialized countries towards climate neutrality”, declared the Minister of Finance in the Bundestag, referring once again to the declared objective of the new coalition government of social- center-left Democrats (SPD), Greens and FDP.

The plan was not well received by everyone. It is “fundamentally problematic to create financial reserves by going into debt and then use those funds to finance projects in the years to come”, according to the German Taxpayers’ Federation. The conservative Christian Democrats (CDU) and the Christian Social Union (CSU), now in opposition, are outraged.

“I consider this supplementary budget to be unconstitutional,” said Christian Haase, fiscal policy spokesperson for the CDU / CSU parliamentary group in the Bundestag. The reallocation of funds, he said, was nothing more than a circumvention of the debt rules enshrined in the Basic Law, the German constitution. “I see these supplementary estimates as the beginning of the end of the constitutional debt brake.”

The curse of compromise

The Minister of Finance finds himself in a delicate situation: for years, he has been pushing for Germany to restore the debt brake enshrined in the constitution. It states that the state can only spend as much money as it takes out, except for a small line of credit to cover emergency expenses.

Due to the coronavirus pandemic, qualified as a major emergency, the debt brake has been suspended. From now on, assures the new Minister of Finance, he will be respected again no later than 2023. But is this realistic? Lindner faces the constraints posed by a governing coalition that will need huge sums of money in the years to come to deal with the consequences of the pandemic – and must also urgently allocate funds to deal with the climate crisis .

Budget without leeway

Lindner has to find some money he doesn’t have. Germany’s federal budget is generally inflexible. One in two euros is allocated to social benefits, the lion’s share of which is made up of pensions. Reductions are not possible, as the aging society is actually increasing aggregate demand. The fallout from the COVID pandemic is also pushing up social spending. During the coalition negotiations, the FDP assured that there would be no tax hike. But that leaves new borrowing as the only option.

Since the start of the pandemic, Germany has taken on much more debt. From 2014 to 2019, all federal budgets were balanced, but in 2020 and 2021 there were record borrowing levels. The mountain of government debt has grown by around € 400 billion in two years to a total of well over € 1.4 trillion. If we combine the debts of the 16 German states and its small local authorities, the total amounts to just under 2.4 trillion euros. It was initially agreed that the debts related to the pandemic should be repaid within the next 20 years. But in the coalition negotiations agreed by the three parties, the debt repayment was extended from 16 to 36 years.

New budget, new debt

In 2022, the federal government will continue to borrow. Under the previous government of Chancellor Angela Merkel, whose new Chancellor Olaf Scholz was finance minister, nearly 100 billion euros in new debt was expected for 2022. However, this was only part of a project. budget that never became law. This is common practice in years when there are general elections; it is then up to the new government either to revise the old draft or to draft a completely new one.

The question is: how much debt will be contracted for 2022? In recent weeks, economic forecasts have been lowered more and more in the face of the fourth wave of the pandemic. Now the fifth wave, triggered by the Omicron variant of the virus, is coming and, as you might expect, will put a further drag on the German economy: it will reduce tax revenues and again increase the need for financial assistance. of the government.

Further rise in unemployment

Aid for companies in difficulty was due to expire at the end of 2021. It has now been extended for six months. According to the Federal Ministry of Finance, nearly 58 billion euros have been paid to companies in the form of non-refundable grants (as of November 2021). Repayable aid, which includes loans, guarantees and state equity investments, amounts to just under € 70 billion.

In 2022, companies will have to start repaying. But how is this supposed to work as the pandemic affects business until next year? It is to be expected that many repayments will not be made, and new claims will also be filed for the contract leave and reduced hours unemployment benefits. The catering, entertainment and tourism sectors have already announced layoffs.

Boost the national economy

Managing the pandemic is only an urgent area. The transformation of the economy towards climate neutrality must begin as soon as possible. “Due to the uncertainties and restrictions of the COVID crisis, many investments in modernizing the economy have been canceled,” Lindner said. He wants to use the 60 billion euros of the new supplementary budget to revive the national economy. “It is essential to start catching up now. We must no longer waste time transforming the economy and society because of the pandemic. Lindner expects this to generate more economic growth and therefore more tax revenue.

The end of austerity in the EU?

It will also be interesting to see how the new finance minister positions himself in EU fiscal policy. Ahead of this year’s federal election, Lindner was seen as a fear sower, especially in southern EU countries, as he wanted to advocate a difficult path to consolidation.

Today, its national supplementary budget of 60 billion euros raised quite different expectations. This became evident during Lindner’s inaugural visit to Paris, when his French counterpart, Bruno le Maire, expressly congratulated him on his move. It has also been noted with approval in France and some EU countries in southern Europe that the new Chancellor, Scholz, and his Vice-Chancellor Robert Habeck (Greens) both warn against austerity in the within the EU.

Until now, the European Stability Pact has only allowed member countries’ debt levels to be 60% of their gross domestic product (the sum of all economic output). Many countries did not comply with this restriction – in some cases significantly. In 2019, Germany was below 60% for the first time since 2002. In 2020, it again exceeded 68%. And the trend is on the rise.

Source link

About Andrew Estofan

Check Also

The future of work is about people, not technology

A World Economic Forum survey indicates that the COVID-19 pandemic has increased demand for greater …