News | Wednesday, 14 January 2009

Germany to ban excessive public borrowing in Constitution

Germany will amend its constitution to ban excessive public borrowing and set up a strict repayment schedule for the public deficit caused by its latest fiscal stimuli, chancellor Angela Merkel said yesterday, underlining Berlin’s rising concern about the erosion of fiscal discipline in Europe.
The announcement came as Merkel unveiled a two-year €49.25 billion package of growth-boosting measures that, together with steps adopted late last year, will raise to 1.5 per cent of gross domestic product the amount the government planned to spend on fighting the economic crisis this year.
But Merkel made it clear she did not want the package to be seen as a signal that Berlin was lowering its guard on balancing its public-sector budgets in the medium-term.
Merkel told journalists: “This is an extraordinary situation and we must respond with extraordinary measures. This means we will have to borrow more.
“But we must also be credible vis-à-vis future generations when we say we intend to repay this debt quickly,” she added.
Officials said they were concerned about rapidly rising deficits in parts of the euro-zone where other governments have also loosened their purse strings to counter the downturn.
Rating agencies have warned Spain, Greece and Ireland in the past days that they could face rating downgrades if their public balances and economic conditions continued to deteriorate.
The spread in bond yields between the benchmark German bunds and equivalent Spanish, Italian, Greek, Irish and Portuguese issues has risen fourfold since July, showing similar anxiety among investors and raising the cost of the measures European governments were taking as they fight the crisis.
Merkel, who delivered a balanced state budget last year before the financial crisis erupted, is keen for Germany to retain its role as a model of fiscal discipline despite nodding through what will be the Federal Republic’s biggest stimulus since its creation 60 years ago.
She said the Finance Ministry would set up a “repayment fund” and draw strict rules to underpin the government’s commitment to repay the extra debt it was now raising.
The fund would be similar to one created in 1995 to manage the repayment of €171 billion in extra borrowings caused by German reunification, a goal that was finally met last year.
The mechanism, to be agreed by the cabinet on 28 January, could include a rule forcing the government to tap windfall tax revenues to repay its debt once economic growth reaches a given threshold, Merkel said.


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14 January 2009

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