Germany Ready to Raise Debt If Recession Hits, Spiegel Reports

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(Bloomberg) — Germany’s government is ready to run a budget deficit if Europe’s largest economy collapses, magazine Der Spiegel reported.

Chancellor Angela Merkel and Finance Minister Olaf Scholz would be willing to increase debt in order to offset a tax revenue shortfall due to an economic slump, the magazine said, citing sources in the chancellery and the that did not identify by name.

The finance ministry declined to comment on the story which caused the euro to pare losses in afternoon trading.

After weeks of growing debate over whether to increase fiscal stimulus, Merkel earlier this week suggested that her government could be more proactive but that it wasn’t time yet for an anti-cyclical package. The head of her Christian Democratic party, Annegret Kramp-Karrenbauer, said on Thursday that the constitution provides some room for maneuver “in a crisis situation.”

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Under the German constitution, net federal debt can increase by only 0.35% of output if there is GDP growth. Rules are relaxed during a recession, allowing a slightly larger increase of debt.

Europe’s largest economy contracted in the second quarter and is forecast to grow 0.6% this year, down from over 2% growth in 2016 and 2017.

Business leaders and candidates to lead the Social Democratic party, Merkel’s junior coalition partner, have been leading calls for the government to loosen its purse strings and abandon the zero-deficit policy.

(Updates with context from fourth paragraph.)

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