German parliament suspends debt brake to fight coronavirus outbreak

The German lower house on Wednesday suspended the country's constitutionally enshrined debt brake, approving a massive stimulus package by Chancellor Angela Merkel's government to weather the economic fallout from the coronavirus outbreak. The epidemic has forced Merkel's right-left coalition government to drop its long-held objection to taking on new debt to revive an economy that had been cooling for months before the outbreak under the strain of trade wars and Brexit uncertainty.

The vote in the Bundestag lower house showed that 469 lawmakers had backed Finance Minister Olaf Scholz's bill seeking a debt-financed supplementary budget of 156 billion euros ($168.39 billion) to finance healthcare expenditure and keep companies afloat. Only 55 lawmakers abstained in the vote on the bill drafted by Merkel's conservatives and their Social Democrat (SPD) coalition partners. It was backed by the Greens, Free Democrats and The Left.

The far-right Alternative for Germany (AfD), which is the largest opposition party, said it would abstain. "That's a gigantic sum, nearly half of our normal budget for one year," Scholz told lawmkers in a special session where lawmakers sat apart separated by a couple of empty chairs in line with hygiene rules.

"And since this is such a large sum, the German Bundestag must decide if it uses the envisaged exemption to the debt rule in the constitution for the case of an extraordinary emergency." The unprecedented measure revealed that only a crisis of the magnitude of the coronavirus can shatter Germany's aversion to debt.

Scholz said the stimulus package was needed "because we need the money so that we can fight the social and economic impact of the crisis with full force," adding that Germany can afford it. Germany had been in its 11th straight year of growth before the outbreak, which is set to plunge Europe's biggest economy into a recession, which the Ifo institute said on Wednesday could see output shrinking by as much as 20%.

The government's package includes a supplementary government budget of 156 billion euros, 100 billion euros for an economic stability fund that can take direct equity stakes in companies, and 100 billion euros in credit to public-sector development bank KfW for loans to struggling businesses. On top of that, the stability fund will offer 400 billion euros in loan guarantees to secure corporate debt at risk of defaulting, taking the overall package to more than 750 billion euros.

The government will give the KfW bank debt authorisation worth up to 200 billion euros. That means overall new borrowing could rise to as much as 356 billion euros this year, depending on how much companies are making use of the tools. The combined sum of new debt represents roughly 10% of Germany's gross domestic product, and that doesn't include a fiscal stimulus package promised by Scholz to take effect after the virus is contained and the economy is picking up again. ($1 = 0.9264 euros) (Writing by Joseph Nasr Editing by Larry King and Angus MacSwan)