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June 4, 2020

GERMANY: A stimulus package for consumption, investment – and green policies

BY Carsten Nickel

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After two days of talks, the grand coalition has agreed on a EUR 130bn stimulus package. EUR 120bn will come from the federal budget and 10bn from regional and local authorities. EUR 60bn are still left from the extra budget agreed earlier this year, thus somewhat limiting the amount of additional borrowing required in yet another special budget this year.

The package demonstrates Berlin’s determination to tackle the crisis proactively, which had already been on display in the European debate. By focusing both on short-term consumption and longer-term investments, the package represents a classic compromise between Chancellor Angela Merkel’s center-right (CDU/CSU) and the center-left SPD. But unlike 2008/09, no designated support scheme was agreed for combustion-engine cars: green policies have become a new standard for all parties involved.

Among the flagship measures on the demand front are a reduction in the standard VAT rate from 19 to 16% (from 7 to 5% for the reduced rate) for six months until year-end (cost: EUR 20bn). Parents will receive a one-off EUR 300 payment for each child (EUR 4.3bn). As the Covid-related collapse in electricity prices has led to fears of an increase in the EEG green energy surcharge, transfers from the federal budget will ensure that the levy will, instead, continue to fall to 6.5 cents per kWh in 2021 and to 6 cents in the following year (EUR 11bn).

In a similar vein, and despite the steep increase in expenditures for the public unemployment and health insurance systems, the government will step in to cap workers’ and employers’ social security contributions at 40% until 2021 (EUR 5.3bn for 2020 alone). Various specific support measures are envisaged for sectors especially affected by the crisis, including, among others, the arts, culture, restaurants, and bars (overall EUR 25bn).

While the demand-focused measures were pushed mainly by the SPD and its Finance Minister Olaf Scholz, Merkel’s CDU/CSU highlighted the importance of a EUR 50bn component focused on investments. EUR 5bn will be passed to nationwide railways company Deutsche Bahn, and another EUR 2.5bn to local transport providers. Support will also be given to companies innovating in software-based 5G and 6G network solutions (EUR 2bn) and for country-wide 5G coverage by 2025. This will be done via increased support for the new federal mobile infrastructure authority, which will invest in reaching those areas not covered under private providers’ buildout plans (EUR 5bn).

Around EUR 10bn have been earmarked for supporting the public and private health sectors, including for vaccine research. Various further measures will support businesses and research in strategic sectors from hydrogen technologies to artificial intelligence, renewables, smart cities, and the digitalization of public administration.

Meanwhile, the federal and regional governments will reimburse municipalities for Covid-related decreases in a central source of local revenues, corporate taxation (EUR 6bn). Moreover, the federal government will permanently shoulder a larger share of municipal expenses for social support and welfare payments (EUR 4bn per year). This could somewhat improve the public investment outlook on the local level.

However, there was no agreement on the bigger idea of a federal rescue fund for Germany’s many over-indebted municipalities. This will now likely be a key demand in the SPD’s 2021 election campaign, especially if the party sends the increasingly visible Scholz into the race to succeed Merkel.

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