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Massive Fiscal Stimulus from Germany Takes Markets by Surprise

The German government announced Wednesday evening an additional fiscal stimulus worth 4% of its GDP or about €140 billion. It leads European countries in terms of government support during the pandemic, proving that where there is a will, there is a way. 

Before the health crisis, the European Central Bank (ECB) and other European institutions, called for countries with large account surplus to increase fiscal spending. Mario Draghi, in particular, is known for calling for structural reforms and more fiscal spending for most of its mandate as the ECB President.

Fiscal Policy vs. Monetary Policy

While monetary policy refers to central banks’ actions to influence the money supply in an economy, fiscal policy refers to government spending. Both fiscal and monetary policies can influence economic growth, especially when they act towards the same goal. An expansionary monetary policy coupled with an expansionary fiscal policy, always produces better and faster results than any other combination between the two policies.

The massive fiscal stimulus announced by Germany less than 24 hours before Thursday’s ECB decision places the German COVID-19 response as almost as high potency as the one in the United States, without including automatic stabilizers (e.g., VAT).

So what did Germany do exactly? The package focuses on the consumer, with the idea of stimulating spending. In this regard, the German government announced a temporary VAT cut from 19% to 16% in the second half of 2020.

It also lowered the energy tax and offered a €300 bonus per child. Moreover, it offered new incentives to buy electric vehicles. These are only the main measures announced, what matters is that the government is active in the fiscal space and has plenty of funds to support such measures.

It becomes obvious that Germany is one of the first countries best placed to recover in the second half of the year and into 2021. More importantly, as Germany is the largest European economy, the spillover effect will stimulate other economies in the European Union.

All in all, a further boost given by Germans to their economy, but a major confidence signal for Europe and the European Union. As a consequence, the German DAX futures gaped over 4% on the announcement, continuing the rally it started for about a month.

The new fiscal package looks well-suited to fight the pandemic, and Germany endorsed the benefits of counter-cyclical fiscal policy.

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