Politics

Hopes of a large spending splurge in Germany are misguided, analysts warn

Key Points
  • Every time German lawmakers raise the prospect of higher spending, market players assess whether there's any firm possibility that it could actually happen.
  • However, analysts are skeptical that Scholz will manage to suspend these debt rules even at local authority level.
  • Following the latest growth numbers, analysts said Germany could face economic stagnation in 2020.
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A potential relaxation of German spending rules is a "false alert," analysts have told CNBC after reports the country's finance chief is willing to load up on new debt.

Every time German lawmakers raise the prospect of higher spending, market players assess whether there's any firm possibility that it could actually happen. A balanced budget has become somewhat of a tradition in Berlin and moving away from that would mark a sharp U-turn in policy, with wider repercussions across Europe.

Olaf Scholz, the German finance chief, is reportedly looking at temporarily suspending the country's debt rules. However, a spokesperson for the minister told CNBC that this is for local authorities rather than central government.

"Finance Minister Scholz wants to present his proposals for regulating debt in the first part of this year. A concept is currently being worked on and different options are being discussed," the spokesperson said via email Thursday.

However, analysts are skeptical that Scholz will manage to suspend these debt rules even at local authority level.

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Parliamentary majority needed

A two-thirds majority in the German Parliament is needed to change the "debt brake" and there's currently not enough appetite, Guntram Wolff, director of the Brussels-based think tank Bruegel, told CNBC Thursday. The chief budget lawmaker for the ruling CDU party (Christian Democratic Union of Germany) has said the party would not support any easing of the debt limits, according to Reuters.

"The discussed operation would also not lead to any changes in the deficit. It is a pure balance sheet operation moving debt from some parts of the government, the cities, to the central government," Wolff explained.

Germany, Europe's largest economy, ran the world's largest current account surplus (which measures the flow of goods, services and investments) in 2019. This marked the fourth year in a row that Berlin achieved the highest surplus in the world, according to data from the Ifo institute.

To see a structural change to the debt brake, we would first need to get a new government.
Carsten Brzeski
chief economist at ING Germany

Chancellor Angela Merkel's government has been under pressure by central bankers and other policymakers to increase spending at a time when the German economy has been on the brink of a recession. Additional spending on infrastructure and other nationwide projects could help the country shield its economy from diminished international trade and other external shocks. It could also spur demand across the wider euro zone.

Following the latest growth numbers, out earlier this month, analysts said Germany could face economic stagnation in 2020, provided there is no policy change.

"A rebound in the German economy is not in the cards, yet. In fact, in the absence of either a significant pick-up in global trade or additional fiscal stimulus, it is hard to see the German economy leaving the slow lane any time soon," Carsten Brzeski, chief economist at ING Germany said in a note in mid-February.

Economic stagnation would add further pressure on the already-weak government. Merkel's CDU party is in search of a new leader, after the announcement that Annegret Kramp-Karrenbauer, the head of the CDU and who was set to replace Merkel, has resigned from the party leadership.

Brzeski told CNBC Thursday that there might be some willingness to increase spending depending on who takes over the party and becomes the next chancellor. However, he said that ultimately "to see a structural change to the debt brake, we would first need to get a new government."