Fiscal Flavours 3 – Germany

Published: October 2019 (5 Min Read)

In a fortnight when we have had some disruption in London from the Extinction Rebellion, it seems right to consider a little green finance.

The European Central Bank has been encouraging the member states of the Eurozone to expand fiscal policy. Some governments seem to be embracing the call, while others seem more reticent.

The country most people wish to see participate is Germany, but the Finance Ministry in Berlin does not offer much encouragement to this view, and they argue that although trade and the automobile sector may be weak the domestic sector is strong. https://www.cnbc.com/video/2019/09/09/deputy-german-finance-minister-rules-out-new-fiscal-stimulus.html

To many people the fact that Germany has a budget surplus and that it can borrow at negative interest rates means that they should take the opportunity to help the stuttering economy.

Chancellor Angela Merkel’s administration ran a record budget surplus in 2018 of 1.7% of GDP, or 58 billion euros ($65 billion), and the debt burden is seen dropping to 51% of GDP in 2023. That’s well within European Union rules requiring a budget deficit below 3% and debt load under 60%. https://www.bloomberg.com/news/articles/2019-07-05/germany-s-tight-purse-strings-are-a-worry-when-borrowing-is-free

Many observers argue that by investing in some infrastructure or by smoothing the transition towards a greener economy the government could bolster the weakening economy. For example, in its most recent report on Germany the IMF said, “with the working-age population set to decline and widespread labour shortages, reforms to raise productivity and domestic investment are key to sustaining growth going forward. The focus should be on upgrading coverage of nationwide high-speed internet, rolling out the e-Government platform, supporting venture capital, and reducing uncertainties around the strategy for an ambitious energy transition program.” https://www.imf.org/en/News/Articles/2019/07/09/na07092019-five-takeaways-from-germanys-economic-outlook

The German Economics Ministry seems to agree, although their proposal seems to be designed to win a few votes, rather than being economically rational. It also appears a little mischievous in a coalition in which the Finance Ministry is run by an SPD politician and the Economics Ministry by a CDU one.

Essentially the Economics Ministry wishes to issue a new 50 billion euro “Green Bond”. According to Der Spiegel it has Angela Merkel’s support, but it has fallen on stony ground in the Finance Ministry. The point of contention is the coupon of 2%. The proponents argue that it would help small savers when investment income is scarce, while the opponents consider it would be a ridiculous gift from the national budget. https://ftalphaville.ft.com/2019/09/17/1568725160000/Germany-s-very-generous-green-bond/

There appears to be a compromise that various federal agencies might raise money for various climate-oriented projects, and that these should be considered separate from the national budget. This sounds a little like the UK’s PFI.

Merkel’s coalition government wants Germany to stop using coal power by 2038 but knows the transition will have an outsized economic and social impact on certain parts of the economy and the country. It therefore plans to channel money to affected regions to help them manage the transition. https://uk.reuters.com/article/us-germany-debt-breakingviews/breakingviews-germany-would-kill-a-few-birds-with-one-green-bond-idUKKCN1V5128

Raising money solely to manage a shift away from fossil fuels would underscore Berlin’s focus on making the transition. It would also give eco-friendly finance a crucial political boost.

My guess is that the investments will happen, with or without “green bonds”, that the interest rate will not be as high as 2%, but that it is unlikely to happen in any major volume until there is more evidence of a weak economy. That evidence seems to be building.

Green budgets and green bonds are likely to receive more consideration in a number of countries over the next few years in my view. Sympathy to or antipathy to Extinction Rebellion is unlikely to change that. Green investments could be used as an excuse to break budgetary rules.