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German government ready to incur in deficit spending

By Alexander Bueso

Date: Friday 16 Aug 2019

German government ready to incur in deficit spending

(Sharecast News) - The German government will break its self-imposed prohibition on so-called deficit spending if the economy falls into recession.
According to reports citing German weekly Der Spiegel, the right-left coalition government is prepared to drop the balanced budget rule that had been in place since 2014 and issue new debt if the economy continues contracting.

A succession of economic shocks, including Brexit, global trade frictions and the impact of uncertainty in countries such as Italy over the past two years pushed economic growth in the Eurozone's largest economy into negative during the second quarter, despite multiple rounds of monetary policy easing by the European Central Bank.

But up until now, Berlin had refused to contemplate incurring in a fiscal deficit in order to further boost the economy, even in the face of criticism that its fiscal rigour was an unnecessary drag on the single currency bloc given the benefits that accrue to it from using the euro as its currency instead of the historically very strong Deutsche mark.

To take note of, sticking to a neutral budget even during an economic recession could lead to fiscal policy in fact turning restrictive.

As well, over the past decade several euro area countries - but not all - had implemented tough economic reforms and fiscal austerity, removing at least some of the potential 'moral hazard' that German officials had often - many times times correctly - argued was a risk if governments pursued expansionary fiscal policies.

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