Ka-boom! How Germany's 'Mr Thrift' Scholz came to splash the cash
By Michael Nienaber
BERLIN (Reuters) - Four months is an eternity in pandemic policy. In February, Finance Minister Olaf Scholz was Germany's Mr. Thrift, a supporter of the "Black Zero" rule for the balanced budget.
Since then, he has shed the country's deeply rooted fiscal conservatism and surpassed more free-running European allies to press for his biggest debt-financed stimulus package during peacetime. On Wednesday, Scholz will present a supplementary budget that will raise new debt this year to a record level of EUR 218.5 billion - this corresponds to around 6.5% of German production.
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Even his tone and language have left the normally reserved and technical pride who has committed to using a "bazooka" to help struggling companies and get Europe’s largest economy out of the crisis "with a Ka boom".
According to three government officials, a parliamentary budget source and a member of the leadership team of his Social Democratic Party (SPD), the pandemic has reversed its waning political fate. This enabled him to get support from the coalition government's left without betraying the right's fiscal orthodoxy, they said.
It even got the 62-year-old into the running to become the next German leader.
"The coronavirus crisis is giving Scholz a new impetus. He can implement a policy change without violating his own principles," said a senior government official and veteran of the SPD von Scholz.
This dynamic also shapes Europe, according to the sources, who refused to be named due to the sensitivity of the matter.
Scholz sees the turbulence as an opportunity to advance his long-term goals. They said: Strengthening EU integration and taking a big step towards a closer fiscal union at a time when the cohesion of the bloc is threatened by Brexit and the challenges of the United States and China.
"Never let a good crisis end," said the finance minister last month, quoting Winston Churchill.
Such ambitions seemed unlikely at the end of last year, when Scholz suffered the greatest political defeat in his career and lost the race for leadership of the SPD, which ruled in a coalition with the Chancellor Angela Merkel's conservatives.
Now, however, Scholz is not standing in the way of a serious rival to become his center-left party's candidate to replace Merkel in an election next year.
Political scientist Lucas Guttenberg, deputy director of the Jacques Delors Center in Berlin, however, warned that the budget shift that has strengthened Scholz's reputation at home and abroad could only be temporary.
"The demand to tighten the belt both domestically and in Europe will reappear as soon as the immediate crisis wears off," he said.
Such a reversal could lead to longstanding criticism of Scholz, including that of the SPD leftists, who accused him of imitating his conservative predecessor Wolfgang Schäuble's prudent fiscal policy, saying that his apparent lack of emotion alienated voters.
When asked to comment on this article, Scholz's spokesman said the minister's recent fiscal change is entirely in line with his support for Keynesian countercyclical spending theory - taking on new debt in a downturn and reducing the debt burden in good Times.
"Use your full strength in a crisis and use it quickly," he added.
In a Reuters interview about the balanced budget last October, he insisted that he saw no need to take on new debt because the weaker growth was still growth - but he also said how it turned out that he was going all-in would if a crisis struck.
"Scholz can now profile himself as a competent, decisive crisis manager and at the same time turn Berlin's financial policy upside down," another official near Scholz told Reuters, adding that the finance minister had worked closely with Merkel on the matter.
The fiscal turnaround is supported by Merkel, who managed to convince Household Falcons in her own conservative camp to alleviate concerns and support massive deficit spending to tackle what is likely to be Germany's deepest economic recession since the end of World War II, third officials said.
"No one here is talking about the black zero anymore," said the person in relation to the goal of a balanced budget, designed by Schäuble and conscientiously adhered to by members of the Merkel bloc.
Scholz has also been well received by the public. Polls have ranked him the second most popular politician after Merkel.
At European level, Scholz was involved in a Franco-German plan for a European restructuring fund, which should enable the European Commission to raise a common debt of 500 billion euros and to pass the money on to the Member States most affected by COVID-19.
While the decision was made public last month by Merkel and French President Emmanuel Macron, Scholz was one of the architects behind the scenes, according to a senior diplomat from a southern EU country.
Southern states such as Italy and Spain were hit hard by the novel corona virus and urged that Germany loosen its fiscal conservatism in order to survive the crisis.
Scholz also advocates that Brussels can generate its own income through a financial transaction tax or the emissions trading system.
One of the officials near Scholz said he wanted to deepen relations with the EU and let the bloc experience his "Hamilton moment" - a reference to Alexander Hamilton, the first US Treasury secretary, to exercise fiscal powers in the late 18th century federally bundled century to generate common revenue and create independent debt capacity.
Analyst Guttenberg noted that Germany has shown little interest in strengthening European cooperation and relations in recent years. "It is very good news that this has changed given the depth of this crisis," he added.
Scholz, who became Vice Chancellor and Minister of Finance in 2018, has put together a network of allies in the ministry, a colossal stone building in Berlin from the Nazi era.
The new faces include the deputy finance minister Jörg Kukies, a former Goldman Sachs banker and long-time SPD member; Chief Economist Jakob von Weizsaecker, former SPD legislator of the European Parliament; State Secretary Wolfgang Schmidt, the well-connected and energetic right-wing man from Scholz; as well as chief spokesman Steffen Hebestreit, a former journalist.
Scholz is a master at surrounding himself with top people who share his vision and complement his skills, said one of the officials who are close to the finance minister.
The pandemic has supported its ambition to become SPD chancellor candidate by solving some of the most controversial issues within the party.
After the balanced budget was gone and the German debt brake was lifted, the pandemic cleared the biggest hurdle for Scholz to be supported by the SPD's left wing, a member of the party's leadership team said.
The high-ranking SPD member, who describes himself as a critic of Scholz, said the finance minister "did an impressive job" during the crisis and his chances of becoming the party's next candidate for chancellor were high.
However, he added that Scholz 'inability to connect with voters remained a weakness: "His conversation about rocket-propelled grenades and the Ka-Boom is actually a bit awkward , just don't change. "
(Reporting by Michael Nienaber; additional reporting by Belen Carreno in Madrid; editing by Pravin Char)
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