Tim Winstone, fixed income portfolio manager, considers the impact on credit markets of a seismic shift in tone on defence and fiscal spending in Germany and a more subtle policy shift at the European Central Bank.
In a week that was a watershed moment for Germany with a substantial fiscal policy and defence announcement, we also saw a more subtle shift from monetary policymakers as the European Central Bank (ECB) adopted a more “evolutionary” approach.
Germany’s fiscal expansion
Overshadowing the ECB decision was Germany’s announcement earlier in the week that it would seek a big fiscal expansion and rise in defence expenditure. The CDU/CSU and SPD parties propose pushing through constitutional changes while the old German government is still holding office and it is more likely it can secure a necessary two-thirds majority in the German parliament. The timeframe is tight as the newly-elected parliament has to commence by 25 March at the latest. Briefly there were three key elements:
- Defence spending exceeding 1% of gross domestic product (GDP) would be exempt from the current restrictions of the constitutional debt brake (essentially allowing the government to raise an unlimited amount of debt to finance military spending).
- The constitutional debt brake would be amended to align federal states with the federal government so that they would be allowed to incur new annual debt of 0.35% of gross domestic product (GDP).
- A special fund for infrastructure would be created allowing €500 billion of spending spread over 10 years.
