(Bloomberg) --

German Finance Minister Olaf Scholz is considering a move that could open an avenue for limited fiscal stimulus in Europe’s largest economy.

Scholz wants to temporarily suspend the constitutional mechanism that restricts the country’s debt levels in order to provide relief for indebted regions, according to an official familiar with the plans.

The initiative, which is likely to face strong political opposition, would shift borrowings from municipalities to the federal government, giving them more budget space to invest locally. Lawmakers informally assessed the cost of the measure at about 20 billion euros ($21.8 billion).

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“We would expect heated discussions about the level and distribution of support, as well as moral hazard problems,” said Christian Schulz, an economist at Citigroup Inc. “There is no guarantee that the plan comes to fruition.”

The news was immediately welcomed by European Central Bank President Christine Lagarde, who wants Germany to loosen purse strings at a time when a recession in manufacturing has brought its economy to the brink of contraction and the coronavirus threatens growth too. Suspending the rule could potentially clear the way for the government to boost its own spending, beyond a trickle of incremental measures currently planned.

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Meanwhile, a senior lawmaker from Angela Merkel’s party promptly rebuffed the move, hinting at the opposition Scholz might face. The chancellor’s CDU group has traditionally opposed such plans, and a change in the debt brake, which is enshrined in the constitution, would require a two thirds majority in parliament -- a difficult threshold.

The suspension is likely to be more popular with Scholz’s SPD party, which wants to ease deficit rules in order to allow more spending.

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A German finance ministry spokesman declined to comment on the news beyond acknowledging that Scholz is working on plans to be presented in the first part of this year.

Even if the initiative were to succeed politically, it’s unclear how much, if any, stimulus would follow -- not least since actual spending increases would be at the discretion of local officials at municipalities, of which Germany has some 10,000. Uwe Zimmermann, deputy chairman of the DStGB federation that represents them, says about a quarter are burdened by residual debt they are struggling to service.

JPMorgan economist Greg Fuzesi said that the impact on Germany’s overall fiscal stance could ultimately be “limited or even zero.”

Calls for more investment spending by Germany have picked up in frequency and urgency amid mounting data showing the economy has yet to tackle its bleak growth outlook, while risks stemming from trade tensions and the coronavirus outbreak loom large.

Germany stands out as the only Group of Seven member with a budget surplus, and a relatively low debt burden. It has long been the target of ECB calls for governments with fiscal space to ramp up spending, and for European Union officials seeking a common budget tool.

“The economy could do with a stimulus,” said Aline Schuiling, an economist at ABN Amro in Amsterdam. “There’s a lot of pressure on Germany to do this.”

Earlier Wednesday the European Commission warned Germany that subdued public investment is putting the country’s growth at risk and could weigh on the euro area. The EU’s executive arm urged Berlin to do more to address a mismatch between how much it saves and invests.

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Fresh risks could make for greater urgency for a shift in gears in Berlin. The coronavirus outbreak moving to Europe has cast fresh clouds over its economy, and officials concede the region will face an impact on growth even if it yet isn’t possible to gauge the severity.

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With interest rates deep below zero and the latest batch of asset purchases still ongoing, room for additional monetary support by the ECB is limited even as money markets now see a cut in borrowing costs later this year. For policy makers in Frankfurt, that makes their case for governments to deliver the next big push for economic growth all the more persuasive.

“Any fiscal measures intended to support the economy are certainly very welcome, particularly under present circumstances,” Lagarde said on Scholz’s plan while at an event in Wiesbaden, near Frankfurt. “So if that has the characteristic of fiscal support and the encouragement to the economy, that’s welcome.”

The swift reaction of Eckhardt Rehberg, the lead budget lawmaker of the CDU/CSU alliance led by Merkel, also suggests how deep-seated feelings are on the matter in some parts of Germany, where fiscal rectitude has long been seen as a symbol of political virility.

“This is a bankruptcy declaration of the finance minister,” he said. “It’s not possible to exempt the constitution as you like it, just as it is not possible to change the basic rights of the people. The CDU/CSU will by no means support this.”

German newspaper Zeit first reported Scholz’s plan earlier on Wednesday.

(Updates with economist comment in fourth paragraph)

--With assistance from Catherine Bosley, Brian Parkin and Zoe Schneeweiss.

To contact the reporters on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net;Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Craig Stirling, Jana Randow

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