German ‘black zero’ budget faces €40bn green challenge

20 September 2019 | Mitigation

For years, a commitment to balanced budgets has lain at the heart of German economic policy. But Berlin’s obsession with the schwarze Null, or “black zero”, is increasingly bumping up against an even more pressing imperative — the generational challenge of climate change.

On Friday, Angela Merkel’s government will adopt a package of sweeping measures designed to ensure Germany meets its 2030 carbon reduction goals. Some estimates have put the final price tag at €40bn.

But evidence is mounting of the contortions the government will have to go through to square its hawkish stance on deficit spending with the huge cost of the climate package. Some of the ideas being put forward for resolving this dilemma have left experts scratching their heads. 

The latest proposal was floated this month by Peter Altmaier, the economics minister and a close ally of Angela Merkel. He envisages a new type of “civic bond” for fighting climate change, with one important feature: it would not show up in Germany’s debt statistics.

The bonds would be issued by a private “climate foundation” that would make interest-free loans to companies and private households to help reduce their emissions. Endowed with €5bn in state funds and a yearly government grant of €1bn, it would also finance itself through “civic bonds” offering a guaranteed return of 2 per cent.

Some have questioned the wisdom of such a scheme when investors are willing to pay for the privilege of lending to Germany: government bonds maturing in 10 years now yield minus 0.5 per cent.

“Why pay 2 per cent interest when the government can borrow at zero per cent or less?” said Marcel Fratzscher, head of the DIW economic think-tank. “It’s just a subsidy to financial investors.”

Germany’s finance ministry has given the idea of the civic bonds short shrift. But Philipp Steinberg, head of economic policy at the economics ministry, defended the 2 per cent figure, saying there was a “political argument” for such a high return.

“You are ensuring more public participation in the fight against climate change, and, by involving ordinary citizens, placing it on a broader public footing,” Mr Steinberg said.

Yet Mr Altmaier’s idea would never have seen the light of day were it not for Germany’s “debt brake”. This constitutional rule limits the federal government’s structural deficit to 0.35 per cent of gross domestic product and bars Germany’s 16 regions from running deficits at all. For months, economists have been arguing it is too restrictive, and that it should be loosened to allow for huge investments needed to modernise Germany’s crumbling infrastructure.

“The problem with the debt brake is it incentivises politicians to find clever ways around it,” said Christian Odendahl, chief economist at the Centre for European Reform.

Mr Altmaier’s climate foundation is just the latest example — though officials say the idea is unlikely to gain full cabinet approval on Friday.

The latest proposal was floated this month by Peter Altmaier, the economics minister and a close ally of Angela Merkel. He envisages a new type of 'civic bond' for fighting climate change, with one important feature: it would not show up in Germany’s debt statistics Getty The centrepiece of the climate change package is instead likely to be a plan to expand Germany’s national emissions-trading system to cover the transport sector and the heating of buildings. This would encourage drivers and home-owners to reduce their output of greenhouse gases without the need for a carbon tax — anathema to Ms Merkel’s Christian Democrats.

Other policies under consideration include a big expansion of public transport, new subsidies for electric cars and their charging points, and a reduction in VAT on train tickets.

Olaf Scholz, finance minister, has insisted that the entire package, which could cost €8bn to €10bn a year until 2023, will be paid for without additional borrowing. Officials said some funds would come from the existing energy and climate funds, special pots of money earmarked for various green schemes which have built up reserves of €7bn.

They also noted that some proposals being mooted — such as higher taxes on short-haul domestic flights and road tolls for trucks — would generate revenues for the treasury and so help to reduce the final bill. Money would also flow in from emissions trading and the auctioning of emissions allowances to energy companies.

Meanwhile, the total cost of the package will be spread out over more than 10 years, out to 2030, which will make it more digestible.

Yet Mr Scholz has also made clear that the package will hurt. “You can’t have climate action at zero cost,” he said. “That goes for the federal budget as well as for ordinary citizens.”

The task for ministers is to reduce the burden on the budget as much as possible - especially at a time when a looming recession could shrink tax revenues. As well as the climate foundation idea, officials at the economics ministry have been mulling a greater role for the KfW, Germany’s state investment bank. Again, money channeled through the bank would not be classed as central government borrowing and would be another way around Berlin’s schwarze Null dilemma.

“The KfW currently hands out €16bn a year in cheap loans — that leads to private investments of €40bn annually, in things like refurbishing old buildings to make them more energy-efficient,” Mr Steinberg said. “But this can be extended to other areas.”

What is clear is that financing the new climate change policies while sticking to the mantra of balanced budgets could prove to be an almost impossible balancing act. For some it highlights the absurdity of sticking so slavishly to the black zero. “Everyone knows it will probably be killed off one day,” said Mr Odendahl, “but no one wants to be the one holding the smoking gun”.


Source: Fianacial Times