Germany is finally ‘opening up’ to more spending, analysts say

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Germany’s Chancellor Angela Merkel gestures as she addresses media representatives after a European Union (EU) summit.

JOHN THYS | AFP | Getty Images

There’s a change in attitude in Germany when it comes to its spending plans, analysts have told CNBC.

Germany is actively looking at ways to invest more — a move that could be controversial in a country where a balanced budget has become somewhat a tradition. However, the increasing risk of an economic recession is putting pressure on German officials to explore ways to open the coffers a bit more.

Data out of Germany has been quite disappointing over the last half a year, leading many analysts to consider the chances of a recession. The German statistics office showed last month that the German economy contracted by 0.1% in the second quarter of this year.

“I think the (German) government is still not too concerned about a real recession, but they are finally opening up for the long-discussed need for more investments,” Carsten Brzeski, chief economist at ING Germany told CNBC via email Tuesday.

Media reports out earlier this week suggested that Berlin is considering a “shadow budget,” which would allow it to take on new debt through new independent public agencies, without including the numbers under its federal budget.

I can assure you that we are sticking to the goal of a balanced budget

Angela Merkel

Chancellor of Germany

This, in theory, should give Germany more leeway to spend in infrastructure and climate policies. At the same time, its balanced budget — one where revenues match or outweigh expenditure — should not be impacted. Price stability is seen as a key part of the German psyche following a prolonged period of hyperinflation in the Weimar Republic in the 1930s.

“A shadow budget could be a good way to pass the holy cow of constitutional debt brake,” Brzeski also said.

Germany’s debt brake

The German constitution includes a rule called “debt brake,” which basically forces its leaders to present budgets without structural deficits or a very limited deficit. Since 2014, the largest European economy has managed to raise public spending without adding new debt — registering a record budget surplus of 58 billion euros ($65 billion) in 2018. However, politicians across the various parties in the Bundestag are wary of using that buffer to spend more due to public opinion.

In this context, Chancellor Angela Merkel said Tuesday that the balanced budget was not at risk. “As a federal government, we take seriously the responsibility for a solid budget policy,” she said, according to Reuters. “And I can assure you that we are sticking to the goal of a balanced budget,” Merkel added.

Brzeski explained that changing the debt break would “take too long.” Thus, having a shadow budget, or even some kind sovereign wealth fund, “would be a good way out.”

“It increasingly looks as if the government will link (any new investment) to climate change. This topic will also get broad support,” he added.

Guntram Wolff, an economist and director of the think-tank Bruegel, told CNBC that the German “government is actively looking into creating a shadow vehicle to fund green investments. They do so more to tackle climate change than to fend off a recession.”

He added on Twitter that the German discussion on a shadow budget is a “good example of how political ideology and rigid rules on debt lead to fiscal gimmicks.”

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