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Debt-averse Germany to take on billions in new borrowings

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In budget adjustments to be put before cabinet this week, Berlin is set to take on around a third more debt this year than initially forecast in December, with the total equivalent to $290 billion. AFP

Debt-averse Germany to take on billions in new borrowings

The German government will borrow a record €240 billion in 2021 and break its taboo on taking on new debt again in 2022, ministry sources said on March 22, as Berlin looks to soften the economic blow of the pandemic.

In budget adjustments to be put before cabinet this week, Berlin is set to take on around a third more debt this year than initially forecast in December, with the total equivalent to $290 billion.

Europe’s largest economy will also borrow €81.5 billion in 2022, breaching its so-called “debt brake” for a third year in a row.

The limit on net new debt is a rule enshrined in the constitution which forbids the government from borrowing more than 0.35 per cent of gross domestic product (GDP) in a year.

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 March 24 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.

The state has already paid out more than €114 billion of financial support to businesses since the beginning of the pandemic in the form of guaranteed loans, direct aid and shorter-hours work schemes.

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 dashed 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 three per cent in January.

Businesses such as restaurants, leisure facilities and cultural venues have remained closed since November, while hairdressers and some shops were among those allowed to partially reopen earlier this month.

In a report published on March 22, the Bundesbank (central bank) predicted that economic output would “contract markedly” in the first quarter of 2021.

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 March 22.

The issue of taking on new debt, which had long been a fundamental red line for 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.

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