Chief economist update: Germany in the budget's shadow

The Global Financial Crisis of 2008 gave birth to "non-conventional monetary policy" - where many developed country central banks lowered interest rates to zero/negative and/or engaged in quantitative easing.

While these prevented the "Great Recession" from turning into an even "Greater Recession" and lifted many world economies, central banks remain stuck in "abnormal" policy settings - rates still zero or close to zero or negative, with some still engaged in asset purchases (QE) ... at a time when economic activity is again losing momentum and fears that another recession is nigh is mounting.

In Germany - Europe and the Eurozone's largest economy - another recession is just one quarter away. German GDP growth contracted by 0.1% in the June 2019 quarter after expanding by 0.4% in the first quarter, more than halving the annual growth rate to 0.4% from 0.9%.

These are desperate times for Deutschland and it calls for desperate measures. It can't do anything anymore about monetary policy, the European Central Bank controls interest rates (currently at zero, it ended QE in December 2018) nor the exchange rate, no more deutschmarks, just euros.

Germany's fiscal spending is also limited.

As per Wikipedia: "In 2009 Germany's constitution was amended to introduce the Schuldenbremse ("debt brake"), a balanced budget provision. This will apply to both the Federal Government and the Lander (German states). From 2016 onwards the federal government will be forbidden to run a structural deficit of more than 0.35% of GDP. From 2020, the states will not be permitted to run any structural deficit at all."

Germany's GDP amounted to around US$4 trillion in 2018 - meaning that based on this law, it's deficit spending is capped at US$14 billion (0.35% of GDP) per annum.

But with deteriorating economic growth (and the possibility of a recession), German GDP would be less this year (perhaps, even in 2020) and by extension, the amount of deficit Berlin could spend on its budget.

But if you ever doubted the saying that "necessity is the mother of invention", have a look at Germany's new attempt at shoring up its economy and avoiding a looming recession.

Non-conventional fiscal policy - "Shadow Budget" - here we come.

Reuters reports that: "Germany is considering setting up independent public agencies that could take on new debt to invest in the country's flagging economy, without falling foul of strict national spending rules, three people familiar with talks about the plan told Reuters."

"The creation of new investment agencies would let Germany take advantage of historically low borrowing costs to spend more on infrastructure and climate protection, over and above debt limits enshrined in the constitution".

Germany would still be subject to the Maastricht Treaty though - but this is more lenient.

"Under the European Union's fiscal rules, countries can run a deficit of up to 1% of economic output as long as their debt-to-GDP ratio is significantly below 60% - something that Germany's Finance Ministry expects to happen this year," Reuters wrote.

"That would mean Germany could take on new debt worth up to 35 billion euros a year, rather than the five billion allowed under its own constitutionally enshrined debt brake."

Germany's plan smacks of desperation and goes against its preaching on austerity and fiscal responsibility and rectitude.

But hey, desperate times call for desperate measures!

Link to something WS4hOYK9