On the same day that Larry Kudlow hinted that the US fiscal stimulus has now grown in size to $2 trillion, or around 10% of US GDP, Germany's fascination with a balanced budget, aka the "black zero" brought about by the country's bitter memories of Weimar hyperinflation, ended with a whimper when Angela Merkel announced on Saturday that Germany would issue or guarantee debt amounting to €356 billion as part of the country's emergency response to fight the coronavirus.
The amount, which is equivalent to to 10% of the country's GDP, is similar in size to China's fiscal response during the global financial crisis, which at the time was 9.7% of China's GDP.
Finance minister Olaf Scholz will also present the German cabinet with plans to create a new €500bn bailout fund to rescue companies hit by the outbreak, according to three people familiar with the plans.
The anchor of the fiscal stimulus package will be over €150bn in new debt issuance as part of what the FT dubbed a "sweeping package of emergency measures to save its economy from the brutal effects of the coronavirus pandemic", in what amounts to a radical break with the strict "black zero" fiscal policies of the past for which Germany had earned the nickname of the "austere" ruler of the Eurozone, and which helped push German debt to record low yields.
At a cabinet meeting on Monday, Scholz will present plans for a €156bn supplementary budget for 2020 and a new €100bn economic stabilisation fund, which will be known in German as the WSF, that can take direct equity stakes in impaired companies, an analog of which will soon be introduced in the US as well as part of the impending bailout of the airline/hotel/restaurant/movie theater sector. It will also be equipped with €400bn in state guarantees to underwrite the debts of companies affected by the turmoil, bringing its total firepower to €500bn.
Finally, Scholz also plans a €100bn government loan to the state development bank, KfW, which has been empowered to provide unlimited cash to businesses struggling with the fallout from the pandemic. Taken together, the supplementary budget, plus the €100BN for the WSF and the €100BN loan to the KfW amount to €356BN — or about 10% of Germany’s GDP.
According to the FT, the WSF will be in effect be a "reactivation" of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. Soffin currently manages the government’s 15.6% stake in Commerzbank, which it is still holding since the bank's rescue during the global financial crisis 12 years ago. We can only wonder what crap this fund will hold in another 12 years.
The massive bailout fund, which will not only underwrite companies’ debts but also recapitalize those experiencing financial difficulties due to the coronavirus turmoil, effectively paving the way for a wave of partial state takeovers.
Just as the government helped the banks after the collapse of Lehman Brothers, "we are now prepared to provide equity for the real economy," Scholz told German radio on Friday. The state had to help companies "that employ an incredible number of men and women and which all of a sudden have no business."
In effect, what Germany is doing is unleashing a massive quasi nationalization of every industry, with the hope of preserving businesses and avoiding a firesale of insolvent assets, and as such the WSF could presage an extraordinary intervention by the state in the private sector. "We will not allow a bargain sale of German economic and industrial interests," economic affairs minister Peter Altmaier said on Friday. "There should be no taboos. Temporary state aid for a limited period, up to and including shareholdings and takeovers, must be possible."
While it is now officially dead, Germany’s addiction to the “schwarze Null” and aversion to new debt was facing mounting criticism even in the month before the coronavirus pandemic first struck: for months, leading economists both at home and abroad have been urging the government to take advantage of low interest rates to take on new debt and invest in Germany’s crumbling infrastructure.
Yet since the full scale of the outbreak became clear, Merkel has stressed that the survival of the German economy was a far bigger priority to her than her commitment to the black zero.
"We’re doing whatever is necessary,” she said on March 11. “And we won’t be asking every day what it means for our deficit."
In addition to passing the supplementary budget and setting up the WSF, on Monday German ministers will meet to loosen one of the country’s most important fiscal rules — the constitutional debt brake. Introduced in 2009, it limits any new government borrowing to just 0.35 per cent of GDP, adjusted for the economic cycle. But exceptions are allowed, and the constitution says the Bundestag can relax the debt brake when the country is hit by emergencies such as natural catastrophes that "significantly impact the government’s fiscal position." Coronavirus is a clear example of such an eventuality. A Bundestag vote will then come in the days following.
"This essentially paves the way for unlimited borrowing,” said one of the people familiar with Mr Scholz’s plans. He said it fitted with the European Central Bank’s announcement last week that it would buy an extra €750bn of bonds in a bid to calm markets thrown into turmoil by the pandemic. “The ECB’s message to the EU member states was clear,” he said. “Fill your boots with debt."
The good news is that thanks to its austere ways, in recent yearsGermany managed to bring its debt-to-GDP ratio to below 60%, while France is stuck around 99%, and Italy is at the forefront with 134.8%. "Even a few weeks ago people were saying we’d gone too far, that we were too focused on husbanding our resources," Mr Scholz said on Friday. “Now you can see we acted correctly.”
Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, and also a vocal proponent of living within one's means , said that until recently there had been “passionate debate” in Germany about the wisdom of sound public finances. "Now we can see very clearly: it was exactly right that Germany consolidated its budget when the economy was doing well,” he told Die Welt on Saturday. “Now we have the latitude to deal with this crisis. Our starting position is advantageous."
There is just one potential snag: the bond market is notoriously fickle, and while German yields plunged when the country had no intention of taking advantage of the unprecedented demand for its debt, it is only when plans change and Germany will now clearly splurge and have to fund these massive new bailouts with hundreds of billions in new debt, that yields will finally soar. Already the yield on the 10Y Bund has soared from -0.9% to -0.2% in just the past two weeks.
One can only imagine what happens when Germany - poster child for monetary prudence - starts the moneycopter. Or another way of saying it: the MMTers got what they wanted. Let's see now if the bond market will allow them to execute their plans - absent central banks monetizing every last bond - or if the bond vigilantes which we taken for dead years ago, were only hibernating.