Germany puts Eurozone on alert as new leader plots loophole around crippling debt rules

Jens Spahn' statement on Germany's coronavirus winter status

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New Chancellor, Olaf Scholz, has announced plans to raise funds without breaking Germany’s debt brake. In order to get around the constitutional cap on borrowing, Mr Scholz hopes his new plan, formulated as part of the coalition with the Green and Liberal parties, will unleash a wave of investment for the country. However, if the plans were put in place, experts believe this could spark concern in Brussels who would then need to change its own fiscal rules and laws as it uses similar calculations for output.

Indeed, one proposal is to alter the “output gap”, which is the difference between Germany’s GDP and the economy’s economic potential.

Commenting on the proposal, Philippa Sigl-Glockner of the Dezernat Zukunft think-tank, told the Financial Times: “If Germany really reforms this rule, it’s likely to feed into the debate about reforming the EU’s fiscal rules.

“The EU uses the same calculation on potential output as Germany does.”

According to estimates, adjusting the “output gap”, could raise €10billion (£8.5billion) a year.

Lars Feld of Freiburg university, a former government adviser dismissed the proposal.

He said: “Pippi Longstocking economics — I make the world as I like.”

Mr Scholz is also contemplating allowing state-owned companies such as Deutsche Bahn and BImA — the Institute for Federal Real Estate – to take on further debt in order to fund investments.

BlmA manages 460,000 hectares of state property but allowing it to take on further debt may help Mr Scholz’s SPD party to reach its goal of 400,000 new flats a year.

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Due to the pandemic, the debt brake has not been implemented.

This has allowed the Government to increase spending ahead of the end of the amnesty in 2023.

There are also further plans to borrow more money to spend, labelled as a climate and transformation fund.

It is thought this could increase €240billion (£204billion) in new borrowing which was raised in 2021 but has not been used.

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Philippa Sigl-Glöckner of think-tank Dezernat Zukunft said: “You really have to ask yourself why we still have this rule if so much effort is going into getting around it.”

Under Mr Scholz, the coalition has also pledged to accelerate the phase-out of coal by 2030.

By 2030, the coalition wants renewables to provide 80 percent of the country’s electricity.

There are also plans to overhaul the country’s immigration rules.

Mr Scholz said: “A lot of people have grown up with the idea that is natural for a member of the CDU to lead the government, and now the Social Democrats will provide the next Chancellor.

“This will be a government of three parties that want to venture more progress for Germany.”

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