Germany’s finance minister has vowed that he will not follow the UK “down the path of an expansionary fiscal policy” as his government announced a €200bn (£177bn) fund designed to protect consumers and businesses from rising gas prices driven by Russia’s war in Ukraine.
Europe’s largest economy will reactivate an economic stabilising fund previously used during the global financial crisis and the coronavirus pandemic, said the chancellor, Olaf Scholz, at a joint press conference with the finance minister, Christian Lindner, and the economic minister, Robert Habeck, on Thursday afternoon.
“Prices have to come down. That is our conviction,” said Scholz, adding: “For them to come down, we will need a big defence shield.”
Expansionary fiscal policies include tax cuts and government spending with the aim of boosting the economy. But they run the risk of causing high inflation and devaluing the currency, as has happened in the UK.
Lindner, of the fiscally hawkish Free Democratic party, said the energy price package would not entail further regular borrowing, adding that Germany was “expressly not following Great Britain’s example down the path of an expansionary fiscal policy”.
“This process is not risky,” he later added.
The economic stabilising fund was set up in 2020 and filled with €500bn to aid businesses affected by lockdown measures. While it is still financed by the state taking on new debt, the fund can only be used for paying for specific measures and thus does not count as part of the regular household budget – ie. the annual budget for the federal government.
Critics say the special crisis fund is a sleight of hand that will allow Germany only on paper to return next year to the debt-to-GDP ratio restrictions that Lindner’s party has championed. The new €200bn “shadow budget” for the energy crisis comes on top of a €100bn fund for rebuilding its military and a €60bn booster for a special fund for climate protection measures that have been passed by Scholz’s coalition government.
At the heart of the package is a temporary cap on electricity and gas prices, which the government says it wants to bring down “to a level where private households and companies are protected from being overloaded”. The difference between the cap and the prices paid by gas importers on the world market would be made up by the state.
In a significant U-turn, Scholz’s government is also scrapping a gas levy on consumers that was due to come in this Saturday. The levy was originally designed to compensate energy suppliers for the increased import costs. But after being agreed by the three coalition parties this summer, it was increasingly seen as politically toxic for rewarding some energy companies already raking in record profits.
A temporary VAT reduction, originally designed to accompany the gas levy, would stay and was not yet priced into the €200bn package, said Habeck.
Economists have warned that a gas price cap could drive up inflation and reduce the incentive for households and businesses to save energy as Germany faces a shortage of gas this winter.
The head of Germany’s federal network agency warned earlier this week that savings targets were not being met and that households were using more, rather than less, gas than in previous years.