• German package of measures against high energy prices met with criticism
• Citi: package can mitigate recession, but not prevent it
• Bond market meltdown euro zone conceivable
With a “double boom” German consumers should be relieved in view of the high gas prices. To this end, the federal government is reviving the Economic Stabilization Fund WSF from the times of the Corona crisis and intends to provide a maximum of 200 billion euros by 2024. The national program includes, among other things, targeted liquidity and equity support for companies, a VAT reduction on gas and district heating, and a price cap for basic consumption of natural gas.
While German companies such as thyssenkrupp welcome the planned relief and German consumers are also likely to be relieved – not least because the controversial gas surcharge has been abolished – the EU has criticized Germany’s solo effort. EU Commission President Ursula von der Leyen warned of a distortion of the common market and sees the competitive equality of companies in the euro zone at risk. “The richest and economically strongest country in the European Union is trying to use this crisis to give its companies a competitive advantage over other companies in the internal market. That’s not fair,” criticized Poland’s Prime Minister Mateusz Morawiecki, speaking of “German egoism”.
But not only fairness within the EU, but also the entire bond market in the euro zone could suffer considerably from Chancellor Olaf Scholz’s “double boom”, warned analysts at Citigroup, according to “CNBC”. The US news site even says that the German relief package could possibly trigger a “meltdown” in the euro bond market.
Is a sell-off in euro bonds imminent?
According to “CNBC”, the Citi experts see several risks that the German relief package could entail. Above all, these are risks in relation to the financing of the package and the associated effects on inflation, the yields on German government bonds, the key interest rate of the ECB and the plans of other euro countries to borrow. Because Germany will get the money for the “double boom” primarily on the bond market by taking on new debt, which will fuel inflation and, according to the news site, could possibly lead to the ECB having to tighten the monetary policy reins even more.
According to Citi analyst Christian Schulz, the issue of new federal bonds is not even the main problem. As he said according to “CNBC”, Germany could certainly afford such a program because, among other things, it has a low level of debt in relation to GDP. The program is much more risky because it could encourage other EU countries that are less financially virtuous to imitate them. “There is a risk that others could follow suit,” says Schulz. Unlike Germany, however, not all EU countries could afford to take on new debt on a large scale. Should they do so, according to the Citi expert, the situation in the euro zone bond market could be similar to that in Great Britain, where British government bonds recently came under dramatic pressure after the British government announced tax breaks combined with plans for large-scale borrowing would have. Investors feared that this could lead to spiraling government debt and uncontrollable inflation rates. “The risk is that this same dynamic is now developing on the continent,” said Schulz.
Analysts skeptical about the positive effects of the relief package
The experts are also not entirely convinced of the positive effects of the “double boom”. According to “CNBC”, the Citi analysts assume that the German package of measures will lower inflation by two percentage points in the coming year and “mitigate the coming recession”, but it will not prevent the economic downturn overall. According to the news site, experts at Deutsche Bank made a similar statement, assuming that the decline in GDP thanks to the “defense shield” could amount to around two percent in 2023 – instead of the previously forecast 3.5 percent.
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