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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.

Published: 22 March 2021 17:06 CET
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

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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