Germany's "Black Zero" Rule May Be Gone Forever

Marcus Ashworth
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Germany's "Black Zero" Rule May Be Gone Forever

(Bloomberg Opinion) -- Germany’s Finance Minister Olaf Scholz has finally admitted economic reality and announced a temporary suspension of the country’s infamous debt brake — known as the Schwarze Null (Black Zero) rule, which insists on a budget balanced between fiscal spending and tax receipts.

This stricture has dominated not just German but all of Europe’s budgetary discussions for a decade. The Germans would never say so, but Wednesday’s move may well become one of those emergency temporary measures that ends up permanent. With the course of the new coronavirus impossible to determine, and with recession already looming over the European Union’s biggest economy, it might be a long time before Berlin can contemplate a reduction in spending again.

The yield on 10-year German government bonds rose by two basis points to -0.49%, a muted response because there’s unlikely to be any need for the state to do more debt sales.

Technically, this measure will give Germany’s regional governments more flexibility in going over their budget limits — with a one-time shift of municipal debt to the federal level — but it’s unlikely to stop there. The Federal government budget will surely follow as the relentless slowdown of manufacturing activity — the proud engine of German economic success — shows no sign of abating. Although the country’s manufacturing purchasing managers survey, a key economic indicator, has recovered from a September low, it remains below the 50 level, which indicates decline. Any first-quarter recovery looks to have been stopped in its tracks by the coronavirus outbreak.

The fiscal softening is a belated bout of common sense for Germany, which enjoyed a 1.9% budget surplus last year. There is plenty of room to play with before the budget goes into the red, so the Schwarze Null won’t be broken straightaway. The ratio of German debt to gross domestic product has slipped below 60%, outshining virtually all other first-rank economies. Berlin has the enviable luxury of all of its bonds out to 30 years in maturity offering negative yields. The Treasury literally gets paid to borrow money.

More than 100 billion euros of municipal infrastructure projects have been shelved or put on hold because of to the debt brake, so there are shovel-ready projects available. This will still need broad political approval, as any big spending will have to clear both the Bundestag and Bundesrat assemblies with a two-thirds majority.

But it should win approval from the Green party, if the plans come with a climate-friendly emphasis. Realistically, the Schwarze Null is unlikely to survive the next national election in 2021 as all the political parties will need to burnish their spending credentials.

It will certainly cheer European Central Bank President Christine Lagarde whose every waking moment is focused on pushing EU governments to turn on the fiscal taps rather than relying on monetary stimulus. If the Germans crack then that would provide cover for other frugal northern European governments to follow.

The coronavirus may provide the perfect alibi for politicians to break their otherwise sacrosanct fiscal vows.

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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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