Optimism around Germany stimulus package 'overdone'
“Germany’s fiscal stimulus package, which includes the €500bn infrastructure spending bill and a softening the debt brake, passed another hurdle on Tuesday, with the country’s parliament voting in favour of the measures in a two-thirds majority. The next obstacle will be for the bill to pass through the regional state governments, but this appears to be merely a formality.
“Clearly, markets are hoping that the measures will mark a significant turning point for Germany’s floundering economy, with European equity markets and the euro supercharged by the news in recent weeks.
“Whether the package will make any difference to the near-term fortunes of the bloc remains to be seen, particular as Germany (while Europe’s largest economy) only accounts for around 30% of the Euro Area’s GDP.
“It's not as if the debt brake hasn’t been broken in the past (to little avail), and while infrastructure investment should provide a fillip to long-term growth, its impact may not be felt for some time (the funds will be allocated over a 12 year period after all).
“We see a slight risk of crowding out given that much of the spending will be funded by increased borrowing, which means higher interest rates. There are also hopes that other countries could follow Germany’s lead, but most nations in the bloc (unlike Germany) have little room to increase borrowing.
“All in all, we think that recent optimism, while far from misplaced, may be slightly overdone.”
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
