The markets punished Liz Truss for the fiscal U-turn in the UK, but left Germany alone

UK Prime Minister Liz Truss is not the only European head of government to attempt a screeching policy U-turn that includes increased fiscal spending, but she may remain the only one to be punished for it.

Germany, home to the world’s fourth-largest economy, scrapped plans on Thursday to burden households this winter with higher energy costs that will take effect from October and instead agreed to to provide €200 billion ($195 billion) in relief it will raise through fresh borrowing to protect businesses and consumers.

Finance minister Christian Lindner blamed the change on Russia, arguing that Germany is in the midst of a “energy war” and must do whatever is necessary to avoid lasting damage to its economic foundation.

“We are clear not following the example of Great Britain towards a broad fiscal policy,” Lindner said on Thursday.

This is the third consecutive year in which the Berlin government has declared a kind of force majeure which prevents it from meeting the budget targets anchored in the German constitution. Before the Coronavirus pandemic, the country had generated a consistent fiscal surplus since 2014.

But by declaring his commitment to fiscal probity, Lindner was able to have his cake and eat it too. The measures, he said, will be comprehensive but aimed at the crisis, effective in providing support and not inflationary in the result.

The markets seem to believe him.

Neither the euro sold off sharply after Germany got back on course—in fact it was trading higher against the US dollar than it was on Wednesday—nor did government bond yields soar. The latter indicates that investors are demanding higher fees for the risk of lending to Berlin.

The details of Lindner’s plan, which Deutsche Bank estimated additional stimulus equal to 5.4% of forecast GDP, not yet fully published. This leads to an additional fiscal strain on the €100 billion in emergency spending for defense as well as the € 65 billion in previous support.

German daily tabloid Bild called the latest explosion of taxpayer money “unimaginable amount” that won’t solve the crisis, but acknowledges that the stakes are high.

The Federation for German Industry said on Thursday that unpredictable energy costs are taking their toll, warning that the country’s economy is in “beginning a deep and lasting recession.”

Germany’s new financial aid plans are reminiscent of the growth-oriented “mini-budget” presented last week by the UK government.

Chancellor of the Exchequer Kwasi Kwarteng abandoned his previous plans for a tax increase, and instead announced the a biggest tax cut package in 50 years. While it was designed to stimulate an economy likely to be in recession, the unfunded nature of the proposal and its focus on relief for the very rich sank the pound and forced the Bank of England to bail out the government.

Afraid of chaos

Deutsche Bank argued that the markets’ better reaction to Germany was partly due to Lindner’s clarification that he would try to stay below the €200 billion earmarked in his new budget.

“This objective is consistent with the experience of such large packages during the COVID pandemic, for example, when the government at the end of the day did not put (all) its money where its mouth is,” it wrote in a note. which is published. on Thursday.

In comparison, Kwarteng has an instant sacked the respected top civil service advisor in his department to take office earlier this month to focus the push for his planned relief not on average households, but on the highest earners in the UK economy.

The ensuing turmoil in the UK capital markets is just the latest in a series of policies by the ruling Conservatives that have helped undermine their credibility as responsible stewards of the economy.

The government has previously implemented several trade barriers with the European Union, its biggest market, to appease the strongly euroskeptic wing of the Conservative party. At the same time it failed to create a free trade agreement with the United States that would compensate for any damage.

So far YouGov polls are now predicting an election sweep for the Tories, with Labor leading the Conservatives by a historic margin of 33 points.

Lindner was clearly scared chaos this week in London and quickly expressed his commitment for returning to a balanced budget next year.

“We want to send a clear signal to the capital markets. Even if we use this rescue fund, Germany is committed to a strong and sustainable fiscal policy,” he said. tweeted on Thursday. “German sovereign bonds remain the gold standard for the world.”

Despite the news that the annual inflation rate has hit double number in September, German 10-year bund yields rose just 6 basis points to 2.18% and in fact eased back on Friday. This suggests capital markets believe that consumer price increases will cool, in part likely due to the effects of deflation from the forecast recession.

It also means, however, that Berlin can borrow at a much lower cost than the UK, whose equivalent gilts are trading at rates of 4.14%, or the United States. The yield on the benchmark US ten-year Treasury briefly hit 4% on Thursday, the steepest reached in 12 years.

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