FRANKFURT — Germany reported its first annual deficit in nearly a decade after suspending its “black zero” budget policy to fight the unprecedented economic collapse from the coronavirus.
The government spent €139.6 billion more than its revenue during 2020, for a deficit of 4.2 percent of gross domestic product, data from the federal statistics office showed Wednesday.
The development in the region’s economic powerhouse highlights the challenge for the EU to reinstate the Stability and Growth Pact with its 3 percent deficit limit. That’s been on hold during the pandemic to avoid constraining spending on health systems. European Economy Commissioner Paolo Gentiloni said this week that a decision whether to extend the freeze will come within weeks.
“It was the first deficit since 2011 and the second highest deficit since German reunification,” the statistics office said. The record was in 1995 when the debt of the Treuhand agency, for privatizing East German industry, was integrated into the general government budget.
Still, the final deficit came in lower than an estimate in January of €158.2 billion or 4.8 percent of GDP. The country’s central bank earlier this week projected that both the deficit and public debt ratio likely will remain broadly unchanged in 2021.
Germany’s iconic “schwarze Null” federal budget balance was a fixture of fiscal policy before the start of the coronavirus crisis. The country’s fiscal prudence, and its preaching to fellow eurozone member countries to tighten their purse strings, drew much criticism during the eurozone debt crisis last decade.
Other governments as well as the European Central Bank and the International Monetary Fund pushed Germany to spend more, to help lift the wider economy. But past thrift left Berlin well positioned to spend aggressively during the outbreak to cushion the economic fallout.
The German economy grew more than expected in the final quarter of last year driven by exports and construction, a separate release from the statistics office showed on Wednesday.
GDP grew 0.3 percent during the fourth quarter and contracted 4.9 percent last year. The eurozone’s largest economy had suffered a historic slump of 9.7 percent in the second quarter before rebounding 8.5 percent in the third quarter.
The government’s commitment to its budget balance started to show some cracks earlier this month, when Helge Braun, Chancellor Angela Merkel’s chief of staff, cautioned that Germany will “not be able to comply with the debt brake” in years to come and floated the idea of amending the constitution to allow for more borrowing. Other government members, including Merkel’s designated successor Armin Laschet, quickly voiced disapproval.
Germany’s central bank, the Bundesbank, similarly maintains that existing fiscal rules offer enough flexibility and must not be ignored. While it argued this week that supportive spending remain appropriate for now, policymakers must ensure solid prospects for public finances. Europe’s fiscal pact and Germany’s debt brake offer the needed short-term flexibility as well as medium-term prudence, it said.
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