Anticipated German stimulus package bounces European markets

The value of the Euro rose sharply against the US dollar on Friday, in anticipation of a major change in German budgetary policy, which could see the scrapping of a ten-year old zero-deficit policy.

European shares bounced up from a six-month low after German weekly Der Spiegel magazine said Berlin was prepared to put an end to a budgetary surplus policy.

Germany introduced the debt-break in 2009 and it was also enshrined into the constitution. It prohibits the government from increasing its structural deficit except in cases where the country faces a natural disaster or a severe recession.

However, the fiscal policy's wisdom has been called into question with increasing frequency of late.

Head of the IW Germany Economics institute, Michael Hüther, said to daily business newspaper Handeslblatt that the policy prevents tax cuts and public investment, limiting the country’s ability to respond to an economic downturn.

Some in Germany are arguing that the time is now right for a change in policy, as Europe's largest economy teeters on the brink of recession. 

In 2009 Germany faced an €86-billion deficit and the debt-to-GDP ratio was 80%. The debt limit allows Germany to borrow no more than 0.35% of its GDP and the 16 federal states were required to bring their deficit to zero by 2020. Germany’s current debt-GDP ratio stands at just under 61% of GDP.

With German 10-year bonds giving negative yield, some have made the argument that it is time to invest heavily in infrastructure and energy transition, allowing domestic demand to grow as the global economy slows down.

Investment in infrastructure has already begun with the announcement that Deutsche Bahn is to receive an €86-billion upgrade to its 33,000 km (20,500 miles) network.

Last week, Chancellor Angela Merkel said that Germany does not need a fiscal stimulus package to change its economic fortunes. She did, however, say that the government was committed to high public spending. 

The Federation of German Industries (BDI) last week made the call for a stimulus package, standing in stark contrast to the Chancellor's position.

According to a recent report by the KfW think-tank, the national debt brake is largely responsible for a chronic underinvestment in smaller towns and municipalities for as much as €138-billion.

The market bounce after Der Spiegel published the news of a potential end to the policy will increase the pressure on Merkel, both domestically and abroad.

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