Giant intervention in the German economy

PETER LUNDGREEN

2022-10-08T07:00:00.0000000Z

2022-10-08T07:00:00.0000000Z

The Manila Times

https://digitaledition.manilatimes.net/article/281805697824842

Business Times

THE epicenter of the many bad economic news this year has been in Europe, particularly in Germany. In the past, the country lived through economic crises of various calibers. But this time, the crisis is unusual and after a long time of hesitation, the German government is opening the money floodgates again. This, of course, deserves some attention. The German aid package will amount to as much as 200 billion euros, a considerable sum compared to annual GDP (gross domestic product) of 3,600 billion euros. The aid package must remedy high energy prices this year and next year, possibly even into 2024. There is no doubt that the very high gas prices will force the German economy down — it is just a question of how far. Investors have been hit from all sides this year but Germany has been on the front line, including the sell-off in the stock markets. An unusual rescue operation The new rescue package of 200 billion euros is an amount that the government in Berlin, unfortunately, does not have in the piggy bank. To prevent the government from doing what it is doing now, the parliament a few years ago adopted the so-called Schuldenbremse, a debt limit. It was decided that it should be included in the constitution so that parliament could not simply decide to take on unimaginable amounts of debt. But now they are doing it anyway, with the message that the “debt brake” will work again by next year. The rule states that Germany may only issue 0.35 percent net of GDP in new debt, although adjusted for cyclical fluctuations. There is, of course, an exception clause in connection with, for example, natural disasters. Russia’s war against Ukraine is also such an exception. Critical investors will argue that the current energy crisis in Germany is due to strategically failed decisions by politicians. The same politicians should, therefore, not be able to lift the debt limit to repair their own mistakes by issuing long-term debt that the next generation will have to pay back in the worst-case scenario. This is by no means the discussion in Germany right now but long-term and conservative investors will notice that Germany is making a short-term solution that may burden the country in the long term. Whatever it is, the German government has conjured the 200 billion euros forward, which is debt-financed. The large amount will, among other things, be used for a rather unusual rescue operation. Gas imports to Germany are predominantly handled by some central players and three companies — Sefe, Uniper and VNG — will be offered special rescue solutions so that they can survive. A gas tax of 2.4 euro cents per kilowatt-hour, which has been much debated, will be removed. If there are still companies that, due to the high gas prices, need help, then this can also be financed by the large aid package. The VAT on gas and district heating was reduced from 19 percent to 7 percent from October 1 until March 31, 2024. However, this is an initiative that is being financed through the normal government fiscal budget. Uneasiness over the aid package Equity investors have not reacted particularly positively to the rescue package. There can be many good explanations, such as the fact that interest rates will continue to rise and that Russia’s war against Ukraine is intensifying rhetorically. There is also the question of how much of the economic downturn the aid package is mitigating. There are historically big differences in how economists assess the outlook for Germany’s economy. Deutsche Bank has quite recently revised the growth forecast further down to an icy level at minus 3.5 percent GDP growth in 2023. As I understand it, purchasing power or discretion on the aid package is not added but further deterioration is avoided for both private companies and households. In some of the latest economic forecasts, currently applicable gas prices have led to further downward adjustments in growth expectations. There is, therefore, a good chance that the downturn will not be quite as bleak as the worst forecasts suggest. That is the good news, but my assessment is that the aid package will not do much other than mitigate an extreme price development for gas in the meantime. After which, a solution to the challenge will probably be found. Overall, however, the aid package is not a solution to change a bad situation into something good. One must remember that Germany was very close to entering a recession before the Covid-19 pandemic, and the fundamentals have not changed. There does not seem to be any firm bottom in Germany’s economy if one tries to take a step forward. This is serious because Germany is Europe’s largest economy, so I very much agree with the stock market’s lack of positive reaction.

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