The program by the new coalition government is likely to result in fiscal expansion, and is expected to support economic growth.

In Germany, the largest eurozone economy, a grand coalition is finally in place. The coalition agreement between the center-left Social Democrats and Angela Merkel’s center-right Christian Democrats provides for a material relaxation in the country’s fiscal policy. Chancellor Merkel’s governing coalition plans to invest nearly 50 billion euros in additional expenditure, according to media reports. Germany has to respect the eurozone’s fiscal rules, as well as its own more restrictive, internal rule on the federal fiscal position. However, both of these permit quite a large change in the fiscal stance.

The German fiscal surplus is about 1.4% of gross domestic product. While the new finance minister, Olaf Scholz, has said he will respect the “schwarze null” — the zero-deficit rule — the relaxation of the fiscal stance is going to start soon. Clearly there is a risk that the relaxation will overshoot. Germany’s Federal Audit Office has already warned of this possibility. This policy relaxation will be supportive of growth in Germany at a time when the domestic real interest rate remains extraordinarily low.

Fiscal policy will be supportive of growth in Germany, at a time when the domestic real interest rate remains extraordinarily low.

A looser fiscal policy will allow domestic demand growth to offset the negative impulse that comes from the external sector, including global trade uncertainties and the euro’s appreciation. Germany’s domestic consumption growth has a tendency to disappoint. But something is changing in the country, and the outlook for domestic spending is improving.


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