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EUROPE

Germany says eurobonds no ‘cure’ for debt crisis

The idea of introducing so-called "eurobonds" across the 17-nation eurozone should not be considered a miracle remedy for its debt crisis, German Chancellor Angela Merkel's spokesman said on Monday.

Germany says eurobonds no 'cure' for debt crisis
Photo: DPA

“The chancellor and the federal government do not share the opinion of many

others that eurobonds are now a sort of universal cure for the crisis,” Steffen Seibert told a regular government news conference in Berlin.

Furthermore, the idea of eurobonds could even hinder Europe from finding an effective solution to the debt crisis that threatens to push the continent and the wider world into a crippling recession.

Berlin “sees the danger that such eurobonds could prevent us from attacking the problem at its roots,” Seibert said. “None of the measures that are being discussed at the moment in public, which includes eurobonds, would bring a solution if they were immediately introduced,” he said, quoting comments made by Merkel last week.

Instead of focusing on eurobonds, European officials should be working on a two-pronged strategy, Seibert said.

Firstly, he called for “quick, consistent, open and transparent measures in the member states to put these countries back on the path of financial stability and … make them competitive.” Secondly there was what Merkel calls the “political solution.”

“This is to create the structures in Europe that have been missing until now to make binding the agreements that already exist,” he said, apparently referring to the EU’s stability and growth pact which sets down basic economic targets and rules for its members – most of which have been flouted for years.

The EU will this week urge eurozone states caught up in the debt crisis turmoil to club together to guarantee each other’s debts, vowing to police national budgets ruthlessly by way of a safeguard.

Among a range of options, the Commission envisages an evolving system of “Stability Bonds” that could bring down the borrowing costs of those under the most pressure “relatively quickly,” documents showed Sunday.

Seibert refused to comment on proposals that have not yet been tabled but hinted that the matter would feature at a meeting on Thursday between Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti.

Berlin has traditionally been opposed to eurobonds since, as Europe’s top economy and its most creditworthy, it fears it would end up guaranteeing the debts of fiscally weaker countries, pushing up its own borrowing costs at the same time.

Additionally, Germany believes that a pan-eurozone bond would take the spotlight off heavily indebted countries and reduce the pressure on them to implement much-needed economic reforms and stabilise their public finances.

But the debt levels of eurozone powerhouse Germany will stay elevated for several years to come, its central bank warned on Monday, as Berlin insists its European neighbours cut their own debt piles.

Germany is expected to have “a debt level above 60 percent (of gross domestic product) for many years,” even without taking into account the current crisis, the powerful Bundesbank cautioned in its monthly report.

With a rapidly ageing and shrinking population, a “loss of confidence” in the solidity of Germany’s public finances could not be ruled out if “further costs” arose, the bank added. This demographic factor “will soon get considerably worse”, the report said, which will automatically push up the debt levels if decisive action is not taken.

As an ageing population retires, tax revenues decline and pension and healthcare costs rise, pushing up a country’s deficit, which is then added to its debt pile.

Germany’s debt is set this year to decline to 81.1 percent of GDP, compared to 83.2 percent last year, according to federal government figures. In addition, a relatively healthy first half of the year economically should cut the deficit to around one percent this year, compared to 4.3 percent in 2010, the Bundesbank said.

AFP/The Local/mry

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ECONOMY

German cabinet agrees record levels of new debt for 2021

The German government agreed Wednesday to take on record borrowing this year to weather the economic blow of the coronavirus pandemic.

German cabinet agrees record levels of new debt for 2021
Finance Minister Olaf Scholz. credit: dpa | Kay Nietfeld

In budget adjustments signed off by Chancellor Angela Merkel’s cabinet, Europe’s largest economy will borrow a total €240.2 billion in 2021, a third more than initially planned.

The adjusted budget, which will see Berlin break its taboo on new debt for the third year in a row, still has to be approved by parliament.

“We have decided to suspend the debt brake once again, and I think that’s justified,” Merkel told the Bundestag lower house, adding that the budget was “measured” despite “more insecurity” than usual.

“We are taking the right measures to manage the economic and financial effects of the pandemic,” added Finance Minister Olaf Scholz.

After maintaining a budget surplus for the last decade, the economic slump caused by the pandemic has forced Berlin to take on €370 billion in new debt in 2020 and 2021, with an extra €85.1 billion planned for 2022.

With the country facing a dangerous third wave and shutdown measures extended into April, Germany’s recovery has proved slower than expected this year.

Having originally planned to halt borrowing in 2022, the government is now aiming to return to its golden rule of fiscal discipline a year later, with only €8.3 billion of new debt in 2023.

The so-called “debt brake” is a rule enshrined in the constitution which forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

READ ALSO: Merkel admits Easter coronavirus shutdown plan her ‘mistake alone’

Germany smashed the taboo in 2020 and 2021 as it scrambled to shield businesses and workers from the economic hit of the coronavirus.

The state has already paid out more than 114 billion euros of financial support to businesses since the beginning of the pandemic in the form of guaranteed loans, direct aid and shorter-hours work schemes.

Yet according to a report published by the German Economic Institute on Wednesday, the crisis has still cost the German economy 250 billion euros so far.

Extended restrictions

Hopes of a recovery this year have been dashed with entire sectors of the economy idled for months and the government revising down its 2021 growth forecast to three percent in January.

As a third wave of the pandemic tears through Europe, Germany extended shutdown measures by another several weeks at a marathon meeting between Merkel and state premiers on Monday.

Though plans for a strict five-day lockdown over Easter were scrapped Wednesday, businesses such as non-essential shops, leisure facilities and cultural venues will still remain largely closed until at least April 18.

In a report published Monday, the Bundesbank central bank predicted that restrictions would see economic output “contract markedly” in the first quarter of 2021.

The measures have also been met with growing frustration from business organisations, with the German Commerce Association warning that 120,000 shops could be forced to close if the measures continue to drag on.

The issue of taking on new debt, meanwhile, has also sparked heated political debate ahead of a September general election.

In January, Merkel’s chief of staff Helge Braun caused a major ruckus within his own CDU party when he suggested that the rule on fiscal discipline should be lifted for several years to come.

SEE ALSO: ‘We have finances well under control’: Germany takes on less debt than expected in 2020

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