Germany sees record GDP decline amid coronavirus spending

Germany, long adverse to being in the red, on Tuesday posted a public deficit of €51.6 billion for the first half of 2020, with coronavirus lockdowns undercutting government revenue as it increased spending.

Germany sees record GDP decline amid coronavirus spending
Photo: DPA

The economy posted a deficit of 3.2 percent of Gross Domestic Product in the six months to June, according to Germany's statistics agency Destatis, above the 3.0 percent limit under EU rules that Brussels suspended due to the pandemic.

In the same period of 2019, Germany recorded a public surplus of 2.7 percent of GDP, or around €46.5 billion.

READ ALSO: Germany debates how to spend massive budget surplus

Destatis revised upwards the GDP estimate for the three months to the end of June to show a contraction of 9.7 percent, better than the initially reported 10.1 percent slump.

It is still “the sharpest decline since quarterly GDP calculations for Germany began in 1970,” the agency said, worse than at the height of the financial crash, when GDP fell 4.7 percent in the first quarter of 2009.

For the first time since 2010, state revenue was down year-on-year, Destatis said, while government spending soared 9.3 percent as it tried to support the economy.

Last week, Finance Minister Olaf Scholz said that Germany will take on yet more debt in 2021 to lessen the impact of the pandemic, forcing it to suspend its cherished policy of keeping a balanced budget.

Scholz previously said Germany planned to borrow around €218 billion in 2020 to help pay for a huge rescue package to steer the country through the coronavirus-induced downturn.

READ ALSO: Germany finance minister sees 'no way back' from EU joint debt

'Road to recovery'

The German economy is expected to see a sharp recovery in the third quarter of 2020 however, after the relaxation of pandemic restrictions allowed economic activity and public life to resume.

A key survey separately found that business morale improved again in August for the fourth consecutive month.

The Ifo institute said its monthly barometer rose to 92.6 points, from 90.4 points in July.

“The German economy is on the road to recovery,” Ifo President Clemens Fuest said.

The index had plummeted to a record low in April when Germany's coronavirus restrictions closed factories, restaurants and shops, before starting a rebound the following month as the economy gradually reopened.

“Today's Ifo index keeps the hopes for a V-shaped rebound alive,” ING Economist Carsten Brzeski said. “However, the fact that a rebound is not necessarily the same as a recovery will be the main theme of the coming months.

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Court turns down AfD-led challenge to Germany’s spending in pandemic

The German Constitutional Court rejected challenges Tuesday to Berlin's participation in the European Union's coronavirus recovery fund, but expressed some reservations about the massive package.

Court turns down AfD-led challenge to Germany's spending in pandemic

Germany last year ratified the €750-billion ($790-billion) fund, which offers loans and grants to EU countries hit hardest by the pandemic.

The court in Karlsruhe ruled on two challenges, one submitted by a former founder of the far-right AfD party, and the other by a businessman.

They argued the fund could ultimately lead to Germany, Europe’s biggest economy, having to take on the debts of other EU member states on a permanent basis.

But the Constitutional Court judges ruled the EU measure does not violate Germany’s Basic Law, which forbids the government from sharing other countries’ debts.

READ ALSO: Germany plans return to debt-limit rules in 2023

The judgement noted the government had stressed that the plan was “intended to be a one-time instrument in reaction to an unprecedented crisis”.

It also noted that the German parliament retains “sufficient influence in the decision-making process as to how the funds provided will be used”.

The judges, who ruled six to one against the challenges, did however express some reservations.

They questioned whether paying out such a large amount over the planned period – until 2026 – could really be considered “an exceptional measure” to fight the pandemic.

At least 37 percent of the funds are aimed at achieving climate targets, the judges said, noting it was hard to see a link between combating global warming and the pandemic.

READ ALSO: Germany to fast-track disputed €200 billion energy fund

They also warned against any permanent mechanism that could lead to EU members taking on joint liability over the long term.

Berenberg Bank economist Holger Schmieding said the ruling had “raised serious doubts whether the joint issuance to finance the fund is in line with” EU treaties.

“The German court — once again — emphasised German limits for EU fiscal integration,” he said.

The court had already thrown out a legal challenge, in April 2021, that had initially stopped Berlin from ratifying the financial package.

Along with French President Emmanuel Macron, then chancellor Angela Merkel sketched out the fund in 2020, which eventually was agreed by the EU’s 27 members in December.

The first funds were disbursed in summer 2021, with the most given to Italy and Spain, both hit hard by the pandemic.