Germany might quit its decade long policy against borrowing to beat recession

For the first time since the economic slowdown has hit the country, German Finance Minister, Olaf Scholz, said, that there could be a possibility of infusing an emergency fiscal stimulus package in the economy, if a full-blown recession sets in.

The conversation regarding the need for fiscal stimulus started after the release of second-quarter economic data by the Federal Statistics Agency (Destatis), last week. The Agency revealed that the German economic slow down has got worse, contracting the economy by 0.1% in the April-to-June period (quarter on quarter). The Destatis also dropped a hint that things do not look well even for the current quarter.

Some, including the country’s central bank, Bundesbank, vote against the introduction of financial stimulus in the economy as Germany’s public sector is running a large budget surplus and has a relatively low debt burden. Even though the economy is likely to shrink further in current quarter, the bank would prefer to stick to its zero-deficit policy.

If the German Chancellor, Angela Merkel, gives a go ahead for fiscal stimulus, the economy would be ditching its decade long policy against borrowing, supported ardently by Scholz’ predecessor, Wolfgang Schäuble. Schäuble’s balanced budget policy became famous with the same of “black zero” approach, as he would not let any balance sheet end up in the red.

The worst hit sectors of the German economy are manufacturing, automotive and exports. According to analysts, any economy which shows negative growth for two successive quarters can be labelled as under recession. Going by this definition Germany is technically in recession, but only its strong consumer spending, construction and employment have been keeping the economy afloat.

As per the media reports, if given the go ahead Scholz would inject stimulus worth €50 billion ($55.4 billion) to lift up the economy.

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