The German government is getting ready to act to shore up Europe's largest economy, preparing fiscal stimulus measures that could be triggered by a deep recession, said two people with direct knowledge of the matter.
The program would be designed to bolster the domestic economy and consumer spending to prevent large-scale unemployment, said the people, who asked not to be identified because the discussions are private.
Similar to bonuses granted in the 2009 crisis to prod Germans to buy new cars, the government is studying incentives to improve energy efficiency in homes, promote short-term hiring and boost income through social welfare, the sources said.
Bunds, or German bonds, extended declines while the euro briefly rose as much as 0.2% to $1.1114 before slipping back.
Signs are mounting that Germany's rigid adherence to its balanced-budget policy is softening.
On Sunday, Finance Minister Olaf Scholz suggested that the government would aim to muster 50 billion euros ($55 billion) of extra spending in case of an economic crisis. Last week, Chancellor Angela Merkel said the economy is "heading into a difficult phase" and that her government will react "depending on the situation."
Germany's central bank warned on Monday that the economy could be about to slip into recession, adding pressure on policymakers.
With Europe's largest economy slowing sharply and Merkel's coalition becoming increasingly unpopular, pressure has increased at home and abroad for Germany to open the purse strings.
Sticking to a balanced-budget policy for roughly a decade has allowed Germany to slash public debt to 60% of gross domestic product from 83% over the past decade.
"Considering that industrial weakness has now persisted for one and a half years, it is remarkable how slowly the debate has moved so far," said Greg Fuzesi, an economist at JPMorgan Chase. "This is partly because the desire to cut government debt is deeply held by all mainstream parties and because the economic slowdown has felt 'strange' so far, with spillovers to the labor market only beginning to emerge now, and in modest scale."
The hurdles for a stimulus program remain high. The government requires the lower house of parliament to declare a crisis so it can issue debt beyond the normal guidelines allowed during a recession. Without a sense of widespread malaise, that approval could be difficult to justify, and Germany is still officially predicting an economic recovery before the end of the year.
"By the end of the year we estimate the German economy might be about 1% smaller than it could have been if the slowdown had been avoided. It could take spending of between 30 billion and 110 billion euros to reverse that damage," said Bloomberg economist Jamie Rush.
Even with German output contracting in the second quarter, officials in Merkel's administration are wary that a knee-jerk spending spree would fuel imports and savings rather than bolster industrial output and protect jobs, the sources said.
Industrial capacity utilization would have to drop significantly for fiscal stimulus to have a meaningful impact, they said. Spending in the amount of 1% of gross domestic product would boost growth by less than 0.5 percentage points, a ratio they consider insufficient.