When coronavirus hit, Germany splashed out on Europe’s most generous package of emergency aid. Now, for the first time since the start of the pandemic, politicians are asking whether the country can actually afford such largesse.
The debate was stirred by last week’s consultations on the 2021 budget. Olaf Scholz, finance minister, shocked MPs by nearly doubling the amount of new borrowing to €180bn. That comes on top of the €218bn of debt Germany is taking on in 2020, the largest amount in its postwar history.
Mr Scholz is unrepentant. “One shudders to think what would have happened here if we hadn’t invested such big sums,” he said on Friday. “Timidity would cost us too dear.”
That view is backed by most of Germany’s leading economists, who insist the country should do whatever it takes to cushion the coronavirus-related slump. The government parties, Angela Merkel’s CDU/CSU and the Social Democrats, are also largely supportive — in public at least. But opposition MPs worry Mr Scholz is storing up trouble for the future.
The expansion in debt is “threatening to become a crisis of the next generation”, said Karsten Klein, an MP with the pro-business Free Democratic party.
For a country that once prided itself on its balanced budgets, the sums are indeed eye-watering. Yet it was clear from the start that the policy of schwarze Null or “black zero” would never survive the coronavirus crisis.
So when the pandemic arrived, Mr Scholz quickly wheeled out his “bazooka” — a €1.3tn programme of subsidies and grants to businesses, supplemented in June with a €130bn stimulus package. He also suspended the “debt brake”, a measure enshrined in the German constitution which limits the budget deficit to just 0.35 per cent of gross domestic product.
Some in the opposition say that Mr Scholz’s motivation in opening the spigots is to improve his chances in next year’s Bundestag election, where he is running as the Social Democrats’ candidate for chancellor.
“The constitution doesn’t say that in an emergency you can spend whatever you want,” said Otto Fricke, an FDP MP and member of the Bundestag’s budget committee. “When in doubt, taxpayers’ money should always be spent cautiously and providently.”
The government insists the surge in spending is a temporary aberration, and normal service will be resumed once the pandemic is over. Germany will, it says, start paying off the pandemic-era debts in 2023, and the debt brake will be restored in 2022.
For some in Ms Merkel’s CDU/CSU bloc, a return to the path of fiscal rectitude cannot come soon enough. “At the moment, politicians are saying: ‘If we’re taking on so much debt anyway, then that means I can squeeze my little project into the budget too’,” said one senior Christian Democrat MP. “That’s why we urgently need to return to budgetary discipline soon.”
But many think reinstating the debt brake in 2022 is unfeasible. Gesine Lötzsch, an MP for the hard-left Die Linke, said the idea is “absolutely absurd”. “No one really believes it [will happen],” she said.
Even in the CDU/CSU group, there is scepticism. “You would have to reduce borrowing from €180bn next year to €10bn in 2022 — the maximum allowed under the debt brake,” said one adviser. “That’s insane. There’s never been such a radical fiscal consolidation in this country.”
The CDU/CSU has ruled out hiking taxes to restore the public finances. That leaves spending cuts — an option the left strongly opposes. “We need binding political guarantees that . . . Germany doesn’t return to harsh austerity policies after the corona crisis,” said Sven-Christian Kindler, a Green MP. “After the bazooka we can’t have a wrecking ball.”
For that reason, many expect the debt brake will have to be modified or even abolished altogether — a move that requires a change to the German constitution. Such an outcome will be more likely if the Greens, who have been highly critical of such strict fiscal rules, enter government after next year’s election, as seems increasingly likely.
Mr Scholz has insisted that Germany’s public finances will survive the rise in spending during the pandemic. The country’s debt-to-GDP ratio will be just 71 per cent by the end of this year — admittedly much higher than the 60 per cent it reached in mid-2020, but “lower than it was after the [global financial] crisis, and the lowest [rate] among all the G7 states,” he said.
He also noted that much of the €218bn in new borrowing for 2020 had not yet been tapped, so that taken together, the total amount of debt for this year and next will be around €300bn.
That has not silenced the critics, who have drawn attention to what they see as serious design flaws in some of the biggest aid programmes. After the government imposed a partial shutdown in November, it said it would pay restaurants, bars and hotels 75 per cent of the revenues they made in November 2019. The scheme was rolled over when ministers extended the shutdown into December.
But a recent study by the German Economic Institute in Cologne (IW) concluded that the €30bn programme was far too generous. Many businesses were making more money than they did normally because it did not factor in the sharp drop in variable costs they were seeing while their doors were closed.
“To refund most of a business’s revenues is neither clever nor fiscally sustainable,” said Carsten Linnemann, a senior CDU MP, adding that only a company’s fixed costs and living expenses should be reimbursed. “We have to think long-term — future generations also need room for manoeuvre.”
Ministers have now indicated that the scheme will not be extended into 2021. “By January we have to draw up more pinpointed aid programmes,” Helge Braun, Ms Merkel’s chief of staff, told Handelsblatt. “The state can act — but not in a limitless way.”
The government is insisting on a swift return to the fiscally prudent policies of the past. But opposition MPs give those assurances little credence. “When you’ve ramped up borrowing in an emergency, it’s incredibly difficult for the state to bring it down again,” said the FDP’s Mr Fricke. “Unfortunately you can just get used to debt.”
Mario Draghi makes his mark with vaccine embargo
It did not take Mario Draghi long to make a mark in Europe as Italian prime minister.
At his first EU summit as premier at the end of last month, the former head of the European Central Bank made a forceful intervention about the slow pace of Europe’s vaccination drive and the need to get tough with pharmaceutical companies over their failure to deliver promised vaccine supplies.
Seven days later, the Italian government confirmed that, with Brussels’ approval, it had blocked a consignment of doses of the Oxford/AstraZeneca vaccine destined for Australia under an EU-wide export authorisation scheme that has been criticised by other countries. The company has fallen far short of its promised deliveries to the EU in the first three months of 2021.
Draghi, a man who earned impeccable internationalist credentials as ECB president, became the first leader to trigger an EU mechanism that critics see as vaccine nationalism that risks undermining the global fight against the pandemic.
“Imagine what would have happened if [former PM Giuseppe] Conte or [Matteo] Salvini had taken such a stance,” said an official with the Democratic party, part of the governing coalition.
Salvini, leader of the nationalist League which is also in the coalition, said on Twitter that he was “proud Italy was the first European country to block exports outside the EU”.
Draghi was installed as prime minister last month to break Italy’s political paralysis and revamp plans to spend up to €200bn in EU funds to support an economic recovery and faster long-term growth. But an alarming resurgence of infections in recent weeks means fighting the pandemic is his overriding priority.
His robust stance on export controls was an expression of “strong restlessness” about the EU’s handling of the vaccination campaign, said Giovanni Orsina, director of the LUISS school of government in Rome.
“The current situation shows a strong fragility in Brussels’ negotiating position towards the big pharmaceutical companies,” Orsina added. “Draghi is using his political clout to redress the balance in this regard, clearly also in Italy’s favour. Absurdly, having a person of extraordinary international prestige allows for a much stronger approach to national protection than a pure sovereigntist as prime minister.”
At the EU summit Draghi asked why the bloc had not imposed stricter vaccine export controls for companies that failed to meet their contractual commitments. Speaking to Ursula von der Leyen, European Commission president, by phone this week, he stressed “the priority goal of a more rapid European health response to Covid-19, especially on vaccines”, according to his office.
Meanwhile he has set out to reboot Italy’s vaccination programme which is run, with varying degrees of success, by regional governments. As of March 5, Italy had administered only 5.2m doses, or 8.6 per 100 people, below the EU average. More ambitious vaccination targets are expected within days.
Draghi has also replaced the coronavirus commissioner with an army logistics general who has experience in Afghanistan and Kosovo and who will work alongside a new head of the civil protection agency. The aim is to speed up vaccination across the country. The government is also weighing up whether to extend the interval between doses in order to increase coverage, as in the UK.
Drive-through testing centres and other sites are being converted into vaccination facilities, and a €500m investment in a new manufacturing plant is planned.
“The Italian pharmaceutical industry is a sector to be proud of, and it is capable of ensuring the production of vaccines at all stages,” Giancarlo Giorgetti, economic development minister and League politician, said earlier this week.
The Democratic party official said replacing the Covid commissioner with a general was “concerning”, but Draghi’s efforts have otherwise drawn broad support.
Raffaele Trano, a former Five Star MP now in opposition, said “the muscular approach and the logistical revolution seem to be paying off, even against the big pharmaceutical companies who are not being reliable at all and whose priority is clearly to put profit before the health of citizens”.
“There is a need to act promptly, and Draghi is doing what he was called to do: speeding up the process as much as possible,” said Paola Boldrini, a centre-left member of the senate who sits on its health committee.
“Europe has acted as best it could, but Italy is in an emergency situation, which is the reason why the current government was formed,” Boldrini added. “Unfortunately, despite the great co-ordination in disbursing recovery funds, with vaccines the EU was not as efficient, the contracts that were signed [with pharmaceutical companies] underestimated the real production capacity of vaccines and Brussels found itself unprepared.”
Italian officials stress that the decision to block the vaccine consignment from Catalent, a Lazio-based fill-and-finish contractor, was taken jointly with the commission in accordance with the export transparency mechanism introduced in January.
“I would not interpret Draghi’s move, co-ordinated with the commission, through the lens of vaccine nationalism but rather of the EU’s willingness and ability to stand up to big pharma to protect its citizens,” said Nathalie Tocci, director of the Institute for International Affairs in Rome. The doses were intended for Australia, a country with few new infections and where the vaccination programme is still in its early stages.
“I don’t think that Italy would have taken this initiative if the country in question was either a developing country or one living through an emergency to the same extent EU member states are.”
“Recently the intra-EU controversy has been between institutions and big pharma, where the accusation is that the EU has not been able to stand up to companies, thus gambling on the lives of citizens,” Tocci added. “Seen through this lens, Draghi’s move, far from being an act of nationalism, could be read as the necessary step to prevent reigniting dangerous Euroscepticism.”
Additional reporting by Silvia Sciorilli Borrelli in Milan
‘After a year we’re back to square one’: Milan locked in Covid’s grasp
This time last year, chef Andrea Berton thought customers “might be overreacting” when they began cancelling tables at his Michelin-starred Milan restaurant amid a rise in cases of the concerning new coronavirus.
“It was a strange atmosphere,” he recalled this week. “The restaurant was suddenly empty at lunchtime and international customers kept calling to cancel bookings and events around the Salone del Mobile,” he added, referring to Milan’s annual furniture fair.
Neither he nor anyone else could have foreseen what would happen next. Days later, on March 8, Italy’s government ordered the immediate lockdown of the wealthy Lombardy region that includes Milan in an effort to stem the spread of Covid-19. The unheard-of restrictions were extended across the whole country the following day, confining 60m people to their homes.
It was the moment that Europe finally woke up to the threat from a virus that had emerged in China around the turn of the year. Within weeks, the entire continent — and soon the whole world — had been brought to heel by the pandemic.
“We were confronted with a virus we knew nothing about,” said Francesco Passerini, mayor of the small town of Codogno, an hour from Milan, where one of Italy’s earliest confirmed Covid-19 cases had been discovered in late February. “We didn’t know how to protect our community and we had people who were very ill. It felt like an impossible fight.”
A year on, an end to Europe’s coronavirus crisis still seems some way off despite the hope offered by vaccines. Most of the continent’s 750m citizens continue to endure curbs on their daily lives and the economic and social toll has been enormous.
In Italy — as in some other EU countries such as nearby Greece and the Czech Republic — the number of new infections is rising as concerns intensify over the threat from new variants. Lombardy, still Italy’s worst-affected region, is grappling with thousands of new cases daily and hundreds of deaths each week.
On Friday, a new two-week partial lockdown came into force across the region, with offices closed and employees told to work from home. Schools and playgrounds are shut and hospitality and travel are banned, although shops remain open — for now.
Yet as cases tick higher, experts fear it is only a matter of time before the curbs are extended.
“It won’t be long before the whole country goes back into the ‘red zone’,” said Guido Bertolaso, Lombardy’s vaccine adviser, this week, referring to the most stringent level in Italy’s coloured tier system.
“Unfortunately it’s not over,” said Passerini, the Codogno mayor. “But it’s not comparable with last year because we’ve learned to live with the virus and now we have a vaccine. So we have something to look forward to.”
Looking back evokes painful memories. The most vivid was the day he and other volunteers had to empty a church to make room for dozens of coffins. “I remember watching the dead bodies being brought in and the church, a place of hope, suddenly turn into a morgue. I couldn’t believe it was happening,” he said.
In the weeks and months that followed, Carla Sozzani, founder of 10 Corso Como, a cultural, shopping and dining destination in Milan’s nightlife district, could not get used to the silence in a city known as a teeming hub for industry, banking and fashion.
“The only noises you could hear, day and night, were the ambulances and the drones they used to check nobody was leaving their homes,” she said. “It was unsettling.”
Mired in a series of lockdowns, Milan has welcomed only a fraction of the 10m tourists who came in 2019, a shortfall that has put immense strain on its economy.
There is hope that the new government of Mario Draghi, an experienced crisis manager who formerly ran the European Central Bank, can bring improvements by speeding up the vaccine rollout and leading an economic recovery.
Sozzani, a self-confessed optimist by nature, was certain that Milan would regain its vigour in time for the rescheduled Salone del Mobile in September, once more people had been inoculated. “The fair is a symbol of Milan and it will represent its rebirth,” she said.
In a sign of his frustration at the slow rollout, Draghi has moved to block the export of 250,000 Oxford/AstraZeneca doses destined for Australia so they could be used in Italy. As of this week, however, under 6 per cent of Italians had received a first vaccine dose.
One Milan-based anaesthesiologist, who did not wish to be named, also warned that intensive care units in hospitals across the region were rapidly filling up again.
“It reminds me of last spring,” she said. “The vaccine makes us hope for the best but we need to plan for the worst, because the rollout is too slow and people are dying.”
Berton was this week forced to close his restaurant again, a “stop-go approach” that he said would be the death of his and other businesses in the city.
“I would never have imagined it would last this long,” he added. “After a year we’re back to square one.”
EU and US agree to suspend tariffs in Airbus-Boeing dispute
The EU and US have agreed to suspend punitive tariffs related to their longstanding feud over aircraft subsidies, in the first breakthrough in trade relations since President Joe Biden took office.
The two sides reached a deal after intensive talks, according to people familiar with the discussions, in a sign that the 16-year-old transatlantic trade battle over state aid to Airbus and Boeing could be coming to an end.
The accord, announced by Ursula von der Leyen, European Commission president, means both sides will suspend tariffs linked to the dispute for four months. The duties have hit products ranging far beyond aircraft, encompassing an eclectic array of goods such as US self-propelled shovel loaders, French wine and even US ornamental fish.
In a statement issued after a call with Biden, von der Leyen said: “President Biden and I agreed to suspend all our tariffs imposed in the context of the Airbus-Boeing disputes, both on aircraft and non-aircraft products, for an initial period of four months.
“We both committed to focus on resolving our aircraft disputes, based on the work of our respective trade representatives,” she said.
The goodwill gesture is intended to prepare the ground for negotiations on a permanent solution to the dispute by setting joint rules on permissible aircraft subsidies.
The US trade representative’s office said that a settlement was needed to address challenges posed by new entrants to the aircraft sector from China. Beijing has made it a priority to break the global duopoly that has dominated for decades.
It added that limits on future subsidies and monitoring and enforcement mechanisms would be part of a deal between the EU and US.
A European official said the announcement came “earlier than expected”, given that Biden’s nominated trade representative Katherine Tai has yet to be confirmed. Countering China and setting transatlantic standards for the aircraft industry were keys goal, the official said.
One European diplomat said that four months would be “enough time to focus minds while still being very do-able”.
The deal came a day after the UK and US came to their own arrangement whereby Washington also agreed to suspend punitive tariffs linked to the dispute for four months.
The UK had already unilaterally stopped imposing its own tariffs at the start of this year. EU officials and other trade experts have questioned whether the UK would have had the right to continue to impose them anyway, given its exit from the bloc’s customs union.
Brussels imposed extra tariffs on $4bn of US goods in November, covering a wide range of products including sugarcane molasses, casino tables and fitness machines.
By then the US had already imposed extra duties on $7.5bn of European exports — the result of Washington’s own World Trade Organization victory against aid to Airbus.
Brussels sees today’s step as a breakthrough that can pave the way for broader co-operation on trade after the tensions of the Trump era — tensions that at times threatened to boil over into a full-scale trade war.
The US-EU aircraft subsidies dispute is one of the longest-running cases in WTO history. Both sides have been found over the years to have failed to properly implement WTO panel rulings on illegal subsides.
The battle dates back to 2004, the year after Airbus overtook its US rival in terms of deliveries for the first time. Having earlier brokered an agreement with the EU on state aid in 1992, the US launched a case against subsidies for the European group that dated back to the 1970s. Initially the US claimed that $22bn in illegal funding had been given to Airbus.
Trade Secrets is the FT’s must-read daily briefing on the changing face of international trade and globalisation.
Sign up here to understand which countries, companies and technologies are shaping the new global economy.
The EU followed up a few months later with a challenge of its own, originally claiming $23bn in illegal aid was offered to Boeing.
The two sides have long remained far apart on the terms of any agreement on how to fund new aircraft development. But with both Airbus and Boeing focused on recovering after the coronavirus pandemic and a hiatus in new commercial aircraft development, industry experts said the timing was right.
The deal will come as a relief to aircraft manufacturers and other businesses on both sides of the Atlantic. French wine producers and Italian cheesemakers have been among those in the vanguard of calls for an end to the dispute. The spirits industry has also been among the US sectors strongly urging a solution.
Airbus welcomed the decision to suspend tariffs. The company said it supports “all necessary actions to create a level-playing field and continues to support a negotiated settlement of this longstanding dispute to avoid lose-lose tariffs”.
Boeing said it hopes the deal would allow for talks to “bring a level playing field to this industry”.
Teachers grapple with how to help students scarred by pandemic
Rio Tinto set to start negotiations over Mongolian mine
UK listing rules set for overhaul in dash to catch Spacs wave
Italy’s government in crisis as Renzi ministers resign
Macron’s war on ‘Islamic separatism’ only divides France further
US allows sales of chips to Huawei’s non-5G businesses
Europe2 months ago
Italy’s government in crisis as Renzi ministers resign
Europe4 months ago
Macron’s war on ‘Islamic separatism’ only divides France further
Emerging Markets4 months ago
US allows sales of chips to Huawei’s non-5G businesses
Europe3 months ago
European truckmakers to phase out diesel sales decade earlier than planned
Emerging Markets5 months ago
Mexico’s Supreme Court approves referendum on presidential trials
Company4 months ago
Most investors now expect the U.S. stock market to crash like it did in October 1987 — why that’s good news
Markets5 months ago
Two top Morgan Stanley commodities traders lose jobs over use of WhatsApp
Emerging Markets4 months ago
Arrest of Mexican general in US shakes López Obrador at home and abroad