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Germany may ease debt limit rules as pressure to spend more grows

BERLIN (Reuters) - Germany’s government is considering suspending strict rules on the amount of debt it can raise, the finance ministry said on Wednesday, as it faces growing pressure to kick-start a sluggish economy by spending more.

FILE PHOTO: German flag is seen outside the German lower house of parliament Bundestag, March 14, 2018. REUTERS/Hannibal Hanschke

The country’s debt-brake law limits the federal deficit in any given year to 0.35% of economic output.

Weekly paper Die Zeit said Finance Minister Olaf Scholz planned to temporarily suspend that restriction to fund local infrastructure projects, notably on roads and schools.

The report drove German government bond yields higher. The 10-year yield rose as much as 4 basis points to -0.47% and was last up 2 bps at -0.49% DE10YT=RR.

Chancellor Angela Merkel’s government has long resisted calls at home and abroad to inject fiscal stimulus by loosening its purse strings, and weak growth rates in the German economy - Europe’s biggest - and the wider euro zone seems certain to decline further as the coronavirus epidemic spreads.

European Central Bank President Christine Lagarde on Wednesday welcomed any efforts by the bloc’s governments to use budgetary leeway to boost growth.

“Fiscal measures intended to support the economy are certainly very welcome, particularly under present circumstances,” she told reporters.

However, many conservative German politicians strongly oppose any such slippage.

Hans Michelbach, a lawmaker for the Bavaria-based CSU, accused Scholz, a Social Democrat, of seeking a return to unstable budgets. “Even giving up the debt brake on a one-off basis would be opening the floodgates of financial policy,” Michelbach said.

Die Zeit said Scholz planned to suspend the debt brake for a short time to allow the federal government to assume some of the obligations of heavily indebted municipalities, thereby freeing up extra funds for them.

Any change to the brake would require approval by a two-thirds majority of both the upper and lower houses of parliament.

That means Merkel’s ruling conservative-Social Democrat coalition would need the support of opposition parties in the Bundesrat upper house, where Germany’s 16 federal state governments are represented - a tricky prospect.

A finance ministry spokeswoman declined to comment directly on the Zeit report but said Scholz aimed to present more detailed plans in the spring. “Currently a draft is being worked on and several variants are being discussed,” she said.

Reporting by Frank Siebelt and Holger Hansen; Writing by Thomas Escritt and Madeline Chambers; editing by John Stonestreet