While there is growing discontent in many European countries about the crisis management there, the approval ratings for the grand coalition in Berlin have risen significantly in recent weeks – not without reason. Not only has the German healthcare system so far presented itself as comparatively robust, but hardly any other government in the euro zone has launched such fast and extensive financial aid for the economy and private households as the German government.
One reason for the German government’s decisive action is the country’s solid financial starting position. After years of budget surpluses and a debt ratio that had fallen to around 60% by the end of 2019, the coffers of the federal and state governments are full to bursting. This is now paying off. Germany was able to pass a supplementary federal budget of EUR 156 billion without worrying about whether the financial markets would be able to cope with an almost doubling of issuance activity this year. This distinguishes Germany from Italy and other peripheral countries, which would probably already be struggling with excessive risk premiums without the comprehensive ECB crisis programme PEPP.
However, Germany’s reputation as an excellent debtor not only ensures access to the capital market. The Finance Agency even generates income by issuing new bonds. With the exception of securities with a 30-year maturity, the entire yield curve of German Government securities is in negative territory. Nor has the announcement of a supplementary budget led to a sustained rise in yields. Bund yields currently react almost inelastically to a change in the supply of government bonds.
The income that Germany will earn from the issue of debt instruments this year could amount to around EUR 3 bn; EUR 1 bn would be accounted for by the new paper issued as a result of the crisis alone. Looking at the total maturity of all the papers likely to be issued this year, the income would even add up to an estimated EUR 10 bn. In economic terms, the financial market is thus subsidising Germany’s corona aid to a certain extent. If yields remain low or even negative in the long term, the effect would even increase significantly over time. Germany could therefore reduce its debt to some extent simply by means of negative returns. Also, against the background of inelastic Bund yields, the finance minister would have less to weigh up between the benefits of individual measures. According to the motto „A lot helps a lot“, all measures that help the country to return to a growth path as soon as possible should pay off. If Germany’s economy grows again and Berlin subsequently returns to a neutral fiscal policy, the debt-to-GDP ratio should also start to decline again soon after a crisis-induced increase.