Pandemic Pushes Germany to Highest Deficit Since Reunification

The ongoing Covid-19 pandemic has caused Germany’s public sector deficit to reach €189.2 billion in 2020. This news marks the first deficit since 2013 and the highest budget shortfall in 30 years. Although Europe’s largest economy grew more than expected in the final quarter of last year, due to the strong export demand from China, it is still struggling to control the economic impacts of the pandemic’s third wave.

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In response to the new wave of coronavirus infections, Chancellor Angela Merkel has extended the country’s lockdown by three weeks leaving bars and other public establishments, designed to boost the economy, closed. The lockdown extension comes as the European Union battles with the U.K. over a limited supply of the vaccine produced by pharmaceutical maker AstraZeneca.

Covid-19 measures have driven governmental spending up by 12.1%  to €1.7 trillion while revenue fell 3.5% to €1.49 trillion. The decrease in revenues was attributed to lower revenues from taxes and tax-like payments. Public expenditure is set to continue with the German Finance Minister, Olaf Scholz, declaring that Germany will spend aggressively during the outbreak to cushion the economic fallout. This spending spree was further encouraged by other governments as well as the European Central Bank and the International Monetary Fund in a bid to lift the wider economy.

In total, it has been estimated that the federal government paid out around 17.8 billion euros in coronavirus aid to small businesses and self-employed workers. Around 13 billion euros were allocated to the health fund, from which health insurance companies received money to finance treatments for their insured persons. The number of individuals on shortened working hours, to avoid mass layoffs, has seen a decline to 2.7 million down from 2.9 million.

After failing to secure enough vaccine doses fast enough, Germany is now in the process of producing more locally to prevent cases from continuing to rise at an exponential rate. This move will make the country less dependent on other markets. According to recent reports around 9% of Germans have received at least one dose of vaccine so far.

How will this impact the Euro?

Europe’s troubles are not expected to improve quickly. Currently, the Eurozone is experiencing a myriad of problems stemming from vaccine rollout delays to new coronavirus cases on the rise, forcing countries like Germany to increase restrictions. Additionally, mass vaccine skepticism has spread due to many nations choosing to temporarily halt the AstraZeneca vaccine in early March. Sooner rather than later, vaccine rollouts will once again generate a momentum which will present a great opportunity to trade EUR/USD.

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