Germany: The End of “Black Zero” Economics
Since the inception of the European Economic Community in 1957, the disastrous extent of financial disruption caused by Covid-19 is amongst the largest economic calamities faced by European Union (EU) Member States. Despite a relatively low mortality rate relative to its western neighbours (at the time of writing), Germany is amongst the Member States at risk of increasing deficit spending to sustain itself during emergency restrictions.
According to the Ifo Institute for Economic Research, a Munich headquartered think-tank, the German economy is at risk of shrinking by 20.6% in 2020 due to Covid-19 if the outbreak continues for a further three months. Following the passing of legislation restricting the operation of non-essential businesses, public gatherings, and schools until at least April 19th according to Chancellor Merkel, the German state has announced plans to subsidise its citizens currently out of work.
Such plans have been authorised by the Bundestag, which has agreed to borrow 156 billion euros to sustain the nation during the pandemic. This is above Germany’s constitutional limit of 100 billion euros permissible in borrowed funds. Clemens Feust, President of the Ifo, notes such costs are ‘expected to exceed anything known in Germany, from economic crisis to natural disasters in recent decades’. With Germany’s major manufacturers such as BMW and Volkswagen announcing plant closures to help quell the spread of infection, Germany’s GDP will decline considerably. Blomberg estimates Germany’s ratio of debt to GDP has declined below 60% as economic activity decreases during restrictions to freedom of movement while borrowing is increasingly relied upon.
It appears that amidst these unprecedented circumstances, Germany will be forced to forgo its famous “schwarze null” (black zero) economic policy that is renowned for encouraging a balanced budget. With high gdp-producing federal states such as Bavaria and Saarland under full-scale lockdown, Germany appears to be willing to compromise its borrowing-averse policies to keep the state afloat.
by Brighton Dube