AXA IM: German fiscal support won’t be in time

12 november 2024

Politiek Duitsland

Don’t count on swift fiscal support from Germany in time to stem a further deterioration in business confidence, writes Gilles Moëc in his weekly Macrocast. Moëc is AXA Group Chief Economist and Head of AXA IM Research.

After the collapse of the German coalition, there is another large economy of the EU operating with a minority government with an unclear path to finalising the budget bill. He adds that the ECB cannot ignore the fact that fiscal policy is unable to provide any meaningful protection in the Euro area at the moment.

According to Moëc, there was a brief moment of hope in the market for a more active budget policy after the exclusion of the fiscally conservative Free Democrats and Chancellor Scholz's proposal to suspend the 'debt brake' for 2025. However as things stand today, it’s unclear if Scholz can secure the needed support or how much impact this would have on fiscal policy.

'It is not obvious the elections, probably taking place in late March would necessarily bring a clarification on Germany’s fiscal stance,' Moëc explains. 'Disposing entirely of the Debt Brake constitutional rule, or at least substantially reforming it, entails a two-thirds majority in both Houses of parliament.'

Current polls show that populist parties on the right and left now hold over a quarter of the electorate, and the CDU-CSU, the likely election frontrunner, remains committed to upholding the Debt Brake.

'In any case, polls suggest that another two or three-way coalition will need to be formed after the elections, which will (i) delay the clarification further and (ii) make negotiations around the fiscal stance tricky,' Moëc concludes.