March 12, 2020 / 11:50 AM / a month ago

FACTBOX-Germany's fiscal firepower to combat the coronavirus

BERLIN, March 12 (Reuters) - The rapid spread of the coronavirus in Europe is raising pressure on Germany to ditch its self-imposed policy pledge of not taking on new debt and unleash a large fiscal stimulus package to cushion the impact on Europe’s largest economy.

Chancellor Angela Merkel told reporters on Wednesday that the government would do everything necessary to combat the pandemic and that the question of whether to run a budget deficit was secondary.

Finance Minister Olaf Scholz has said the government had the power to react “quickly, decisively and strongly”, adding that its prudent budget policy of the past was putting Berlin in a position now to fight an economic crisis with “full force”.

Below are some facts about Germany’s fiscal firepower, the self-imposed balanced budget goal and the limits of the constitutionally enshrined debt brake.

HOW MUCH MONEY IS THERE TO SPEND?

Germany’s federal government has put aside more than 48 billion euros since 2015 in a so-called refugee reserve. The money was originally meant to finance the costs of housing and integrating an influx of more than 1.5 million migrants, but it was not needed thanks to record-high tax revenues.

The finance ministry says it has earmarked most of the reserve now for other measures in its mid-term financial planning until 2024, but this decision could be easily reversed to make the money available for any stimulus package.

The Federal Labour Office has accrued financial reserves over the past years of some 26 billion euros, an unprecedented high thanks to record-low unemployment. The money can be used to finance state aid for companies under short-time work schemes.

The cabinet on Wednesday passed new rules making it much easier for companies hit by the coronavirus outbreak to tap those funds so that they can put staff on reduced working hours, bridge liquidity problems and avoid layoffs.

Germany’s public health system has accumulated financial reserves of nearly 20 billion euros. This not only helps doctors on the frontline, but also shows that there is no imminent need for a cash injection by the government.

So altogether, Germany has more than 93 billion euros to use.

HOW MUCH DEBT COULD BE RAISED?

Merkel’s government has increased spending since 2014 without incurring new debt thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s loose monetary policy.

The self-imposed goal of keeping the federal government’s budget balanced is viewed as a historic achievement for Merkel’s conservatives, especially Wolfgang Schaeuble, finance minister between 2009 and 2017, widely seen as the father of the so-called “black zero” budget.

But Merkel’s comments on the “special situation” created by the coronavirus outbreak open the door to new borrowing and possibly stretching the debt rules to their limit.

Under a constitutional amendment introduced by Merkel’s conservatives and the SPD in the wake of the global financial crisis of 2008/09, the federal government can take on fresh debt equivalent to 0.35% of gross domestic product.

That would be roughly 12 billion euros per year, depending on factors such as real growth and the outflow of earmarked funds in special purpose funds.

The government can go beyond that if Germany is hit by a natural disaster or “exceptional emergencies” that are beyond the control of the state and significantly affect the state’s financial situation, according to the fiscal rules.

This means that the European Union’s less strict fiscal rules would apply which in Germany’s case would allow new borrowing by the equivalent of 1% of gross domestic product or roughly 35 billion euros per year. (Reporting by Michael Nienaber, Editing by Alison Williams)

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