Germany Closes In on Historic Bailout to Counter Virus Blow

We’re tracking the latest on the coronavirus outbreak and the global response. Sign up here for our daily newsletter on what you need to know.

Germany took a step toward declaring a state of emergency to unlock a historic rescue package to cushion the blow of the coronavirus pandemic.

Finance Minister Olaf Scholz urged lawmakers to open up constitutional debt limits to combat a crisis that threatens modern life. New borrowing of 156 billion euros ($169 billion), equivalent to half of the country’s normal annual spending, will be used to fund social benefits and direct aid to virus-hit companies.

“There is no blueprint for countering such a crisis,” Scholz said Wednesday in the Bundestag in Berlin, filling in for Chancellor Angela Merkel who is at home in quarantine. “We’re doing that with an enormous amount of money, as precisely as possible.”

The package comes as the economy braces for its biggest slump in decades. Business confidence is collapsing at a record pace amid restrictions to slow the spread of the disease, and the Ifo economic institute predicted mass bankruptcies in what may be a deeper slump than during the financial crisis.

Germany’s ruling coalition of Merkel’s conservative bloc the Social Democrats cast aside infighting to push for emergency powers, abandoning its long-standing balanced-budget policy. Lawmakers will vote on the legislation later on Wednesday.

Backed by broad political support, the government plans to unleash a barrage of debt-financed measures totaling more than 750 billion euros to counter what Merkel called the biggest challenge to Germany since World War II. The package includes loans, guarantees and aid for large and small companies and money to potentially buy stakes in stricken businesses.

Germany’s Virus Package
  • 156 billion euros in debt, or about 4.5% of GDP, to finance higher social spending and a 50 billion-euro liquidity fund for self-employed people
  • 600 billion-euro rescue fund
    • 100 billion euros in loans through state-run development bank KfW (potentially financed with new debt)
    • 100 billion euros earmarked for equity stakes in companies (potentially financed with new debt)
    • 400 billion euros in guarantees
  • Additionally, the state’s KfW bank has 500 billion euros available to boost liquidity of German companies

In its effort to defend its economy, the government is ready to nationalize businesses, Justice Minister Christine Lambrecht said in an interview with Handelsblatt newspaper. Germany must protect its “economic structure” and prevent the sale or break-up of important companies, she said.

The country, which tightened lockdown measures this week, has about 32,700 cases and more than 150 deaths, according to data compiled by Bloomberg.

The debate as well as the voting procedure will be affected by Germany’s containment measures, which prohibit gatherings of more than two people and restrict distances to at least 1.5 meters (5 feet) — all but ruling out discrete consultation between lawmakers on the floor of parliament.

Caucus leaders have requested that only members with expertise in relevant fields, such as budget and finance, attend the debate. Rather than lining up at ballot boxes at the front of the plenary hall in the glass-domed Reichstag, lawmakers can cast their votes at several urns arrayed around the building to help maintain safe distances.

Merkel remains in precautionary quarantine after coming into contact with a doctor who later tested positive. Her initial test for the virus on Monday was negative.

Data on Tuesday acted as a reminder for how devastating the virus-fighting measures are for the country’s economy. In March, IHS Markit’s gauge of manufacturing and services activity plunged, signaling that GDP in the euro area’s biggest economy could drop by around 2% in the first quarter already. Scholz said Germany is likely to suffer a bigger blow than during the financial crisis more than a decade ago.

Governments around the world are trying to cope with an influx of patients into hospitals and the effects on economies of keeping everyone indoors. Euro-area finance ministers took a small step toward a rescue package for struggling member states on Tuesday as fatalities climbed in Italy and Spain and evidence piled up of the coronavirus’s crippling economic impact.

Aside from the current emergency relief, Germany’s government is evaluating a stimulus program to help revive the economy, if the country enters a deep recession after the pandemic is contained. The measures, which could involve consumer spending and corporate-tax relief, would be targeted for short-term impact, accorrding to a person familiar with the discussions.

“When at some point we are able to get this pandemic under control, and we can see economic light at the end of the tunnel, then there will certainly be growth measures to get the economy going,” Labor Minister Hubertus Heil said on Deutschlandfunk radio. “But the strong and positive message is that we are well prepared for such situations. We are a strong social state. We’re not like in America.”

Even with its financial muscle after years of budget surpluses, concerns are growing that Europe’s largest economy could buckle under the pressure of a prolonged shutdown.

Carsten Linnemann, deputy caucus leader of Merkel’s Christian Democrats, urged the federal government to allow economic activity to restart after the Easter break in April.

“For the entire economy and our nation, the damage will be sustainable and take decades to be repaired if we don’t gradually start up the economy again after Easter at the latest,” he said in an interview with Bild newspaper.

— With assistance by Iain Rogers

Source: Read Full Article