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FINANCE

Debt-averse Germany to take on new borrowings to soften pandemic blow

The German government will seek to suspend a constitutional rule against the state taking on new debt for the third year in a row in 2022, AFP learned from ministry sources Monday, as Berlin looks to soften the economic blow of the pandemic.

Debt-averse Germany to take on new borrowings to soften pandemic blow

Europe’s largest economy will borrow 81.5 million in 2022, breaking its so-called “debt brake” rule, which forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

In 2021, Berlin is set to take on 240.2 million of additional debt, around a third more than initially forecast in December.

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

The budget adjustments drawn up by the finance ministry will be presented to the cabinet on Wednesday and would then require approval from parliament.

Germany smashed its domestic taboo on new government borrowing in 2020 and 2021 as it scrambles to shield businesses and workers from the economic hit of the coronavirus.

READ ALSO: ‘Doing nothing would be more expensive’: Germany to take on debt again in 2021

The German economy suffered its biggest contraction in 2020 since the 2009 financial crash because of the pandemic, although the decline was smaller than the slumps seen in other European countries.

Yet hopes of a recovery this year have been hit by ongoing shutdown measures which have seen entire sectors of the economy idled for months, with the government revising down its 2021 growth forecast to 3 percent in January.

As a third wave of the pandemic tears through Europe, the government is expected to extend and tighten lockdown measures into April following a meeting between Chancellor Angela Merkel and regional leaders on Monday.

READ ALSO: EXPLAINED: These are Germany’s planned new lockdown measures

The issue of taking on new debt, which has long been a fundamental red line for Chancellor Angela Merkel’s government, has also sparked heated debate at the beginning of an election year in 2021.

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

READ ALSO: Row breaks out over call to ease Germany’s ‘debt brake’ for years

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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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