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ECONOMY

Germany to borrow €218.5 billion to fund coronavirus stimulus

The German government plans to take on €218.5 billion in new debt this year to pay for massive stimulus to help the country recover from the coronavirus impact, finance ministry sources said Monday.

Germany to borrow €218.5 billion to fund coronavirus stimulus
Olaf Scholz speaking at a press conference in Berlin on Friday. Photo: DPA

The new borrowing marks a watershed for Chancellor Angela Merkel's government, which has long prided itself on fiscal discipline and balanced budgets.

But the coronavirus has forced a major U-turn in Europe's top economy, with
the government agreeing in March to lift a constitutional “debt brake” to help
the country weather its worst recession since the end of World War II.

Finance Minister Olaf Scholz is set to unveil Berlin's second supplementary
federal budget on Wednesday, officials in the finance ministry told AFP.

READ ALSO: Coronavirus in Germany: Who will receive financial help – and how much?

The budget will include €62.5 billion in new debt and will come on top of €156 billion of new borrowing already approved by Merkel's cabinet in March.

That would bring new borrowing to €218.5 billion this year and lift Germany's overall debt burden to around 77 percent of gross domestic product — well above the European Union's 60 percent ceiling.

The extra money would be used to cover the government's coronavirus stimulus spending and make up for lower tax intakes as companies and employees grapple with the fallout from lockdown measures that choked off economic activity.

The new debt “is part of a fiscal policy aimed at overcoming the crisis”, a finance ministry source told AFP.

“It's money well spent,” the source added. “Today's debt is tomorrow's tax revenue.”

The government, which has run a federal budget surplus since 2014 and for years ignored calls to spend and invest more, stunned observers in March when it unveiled a €1.1 trillion coronavirus rescue package.

The package, which includes cash injections, loan guarantees and a beefed-up shorter hours scheme, was aimed at safeguarding companies and jobs as the crisis hit.

As Germany emerges from lockdown and the virus outbreak appears to be under control, the government went a step further and earlier this month announced
an additional €130 billion stimulus package to jumpstart the battered economy.

It includes a reduced sales tax, a €300 bonus per child for families and higher rebates for electric vehicles, all part of a push to get Germans shopping again.

The government has said it expects the German economy to shrink by a record
6.3 percent in 2020 before bouncing back to growth in 2021.

READ ALSO: Here's when families will receive Germany's Kinderbonus cash

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

READ ALSO:

With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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