September 30, 2019 / 8:15 AM / 23 days ago

Merkel's conservatives vow to stick to policy of no new debt

BERLIN (Reuters) - German Chancellor Angela Merkel’s centre-right party has vowed to stick to its ‘black zero’ budget policy of no new debt, despite growing pressure at home and abroad to ditch the fiscal rule, a senior party official said on Monday.

FILE PHOTO: German Chancellor Angela Merkel, Mike Mohring, CDU state chairman of Thuringia and top candidate of the party for the upcoming state elections, and Birgit Diezel, president of state parliament Thuringia react as they attend a celebration event of the CDU Parliamentary Group in the State Parliament Thuringia for the Day of German Unity in the state parliament building in Erfurt, Germany, September 27, 2019. Jens Meyer/Pool via REUTERS

The party board of the Christian Democrats (CDU) passed a manifesto proposal calling for responsible and solid fiscal policies, including a ban on any new borrowing, its secretary general Paul Ziemiak said.

Germany’s constitutionally enshrined debt brake allows the federal government to run a small budget deficit every year while the self-imposed balanced budget pledge, also known as the ‘black zero’, rules out any new borrowing.

“The CDU is sticking with the black zero, it is sticking with the debt brake,” Ziemiak said, adding that it was important to keep public finances sustainable and avoid burdening future generations with more debt.

“If we talk about sustainability, we cannot just give in as soon as the wind blows a bit more fiercely,” Ziemiak said amid growing calls for Berlin to finance a fiscal stimulus package with new debt to support Germany’s slowing economy.

In its proposal for the CDU party conference in November, the board members recommend the delegates to endorse the Maastricht treaty, the EU Stability and Growth Pact, the constitutionally enshrined debt brake and the ‘black zero’ policy of not incurring new debt.

Merkel’s government has managed to raise public spending without incurring new debt since 2014, thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.

But with the economy slowing and tax revenues waning, the fiscal room to counter a recession is getting smaller. At the same time, Germany’s borrowing costs have turned into premiums, which means investors are actually willing to pay the German state a bonus for being able to lend it billions of euros.

PRESSURE

The powerful BDI industry association last week raised the pressure on Berlin to rethink its budget priorities, saying Germany should ditch its policy of not taking on new debt in light of zero borrowing costs and huge investment needs.

Former German finance minister Wolfgang Schaeuble, the mastermind behind the ‘black zero’ policy, last Wednesday also called for a reappraisal of Berlin’s fiscal policy to meet the challenges arising from climate change and digitalization.

Schaeuble said politicians should use the fiscal leeway of the constitutionally enshrined debt rules, implying that the policy of no new debt should not be a maxim anymore.

Under the debt brake, the federal government can take on new debt of up to 0.35% of economic output. That would be roughly 5 billion euros ($5.5 billion) in 2020 after special factors such as growth have been taken into account.

The permitted debt would rise to 8.4 billion euros in 2021 and 9.7 billion euros in 2022, according to budget experts in parliament.

Writing by Michael Nienaber; Editing by Gareth Jones

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