Germany: Government announces unprecedented fiscal aid package to combat Covid-19
In mid-March, the German government announced approximately EUR 1.1 trillion would be mobilized to combat the severe economic fallout of the Covid-19 pandemic. This will be partly financed through a supplementary budget encompassing new borrowing of around EUR 156 billion euros, which was made possible by the easing of the constitutionally-imposed debt brake—an unprecedented move. While these measures are highly unlikely to prevent the economy plunging into a technical recession, they should not raise fiscal concerns given the health of government finances in Germany.
A large chunk of the fiscal aid package (approximately EUR 600 billion) is labeled for a stabilization fund for companies in order to tackle liquidity issues through public guarantees; equity stakes; and loans from the state investment bank (KfW). The KfW, meanwhile, will provide loan and credit guarantees, with no upper limit on the amount of loans that can be issued. Additionally, the government announced tax and social security deferrals, while freelancers and small firms will receive up to EUR 15,000 for three months as fiscal support. These measures, together with the ECB’s extended quantitative easing plans and the expansion of the short-term work scheme, should limit private-liquidity issues and limit job shedding. However, they will only be able to cushion the blow.
Commenting on the fiscal bandage, Carsten Brzeski, chief eurozone economist and global head of macro at ING, stated: “The government measures to limit the outbreak of Covid-19 have put the economy into an induced coma. With a fiscal big bang, the government tries its own ‘whatever it takes’ to keep the patient alive.”