Upheaval in financial policy: “Corona has poisoned the debt brake”

Upheaval in financial policy
“Corona has poisoned the debt brake”

After years of “dogmatic” budget policy under the sign of the black zero, Germany took on hundreds of billions of euros in new debt during the crisis. The economist Rudolf Hickel warns against returning to the old “uptight” approach to the topic and to a strict application of the debt brake.

ntv.de: The first lockdown began a year ago, which was also the starting signal for the large – debt-financed – aid and spending programs in Germany. After the black zero years, German public finances are showing a large deficit again for the first time. Is this a short episode owed to necessity or is it a break?

Rudolf Hickel: In order to understand the scope of what is happening there, you have to see what was true before the Corona crisis. Germany was shaped by the dogma of the state without new indebtedness. It has been in the Basic Law since 2011: the federal states were not allowed to take on any new debt, apart from the cyclically permissible borrowing, and the federal government was only allowed to take on 0.35 of the gross domestic product. Anything beyond that was considered a violation of budgetary policy à la Swabian housewife. The previously applicable golden rule was abolished: despite the economic and ecological benefits, public investments could no longer be financed with loans. This expressed a deep mistrust, especially against the parliaments, which were not trusted to have the competence for a solid financial policy with the instruments of borrowing. It was believed that only constitutional bans can save us from engaging in unsound financial policy with national debt.

And what has the Corona crisis changed about it?

Of course, even before Corona there were serious voices among economists who saw that the debt brake acts as a brake on future investment. But the opinionated policies of the vast majority have ignored the many positive arguments. And then the corona crisis breaks in with the crash in government revenues and the inevitable explosion in spending. The state takes on hundreds of billions of euros in debts in a very short time and without major debates – the federal states and federal states alone 288 billion euros in 2020. This year, the federal government alone is planning a new debt of more than 240 billion euros. We see that we can finance the financial burdens of the Corona crisis, all in all currently more than 1.32 trillion euros, without collateral damage. It was not a dispute but the real crisis that broke the taboo on the debt brake. We have also seen that the terrible scenarios we feared did not materialize. It has always been said that if we deviate from the austerity course, the financial markets lose confidence and the interest burden and inflation skyrocket. But the opposite is the case: there is almost a run of investors on the international financial markets, despite negative returns on the new German debt.

But none of that is a paradigm shift. There are many voices in the Union and FDP who are calling for a quick return to solid financial policy and thus, from their point of view, to the black zero.

It has not yet been decided whether there will be a permanent paradigm shift in German fiscal policy. The question of who pays the bill for the debts as a result of the Corona crisis is gaining momentum. Some actually want to pay off the debts as quickly as possible, as is also provided for in the debt brake in the Basic Law. This rush of repayments would, there is no other way of putting it, trigger a macroeconomic, social and ecological catastrophe. Because that would require tax increases and drastic savings in public budgets. But my impression is that these are retreat battles. The debt brake poisoned by Corona forces a return to a solid use of public loans for future generations. Even in the conservative camp, at least for an extension of the time free from the debt brake – initiated by the Federal Chancellor – is thinking. Reforms in the direction of easing are also being discussed. That will certainly still play a major role in the election campaign.

Among other things, Professor Rudolf Hickel heads the Labor and Economics Institute at the University of Bremen.

(Photo: picture alliance / dpa)

What alternatives are there to deal with the debt?

This German debate about the return to the debt brake through repayment is dogmatically uptight. In other countries such as France or the USA, this discussion is now completely unthinkable in the midst of the crisis. On the contrary, Joe Biden’s $ 1.9 trillion program insists on debt financing to bail out and strengthen the United States. We too must learn to overcome the ideologically driven fear of national debt. First of all, the federal government is currently not only paying no interest on its debts, it is even taking some from financial investors. Second, inflation is also not a problem in the medium term, and thirdly, there is a large surplus of savings in both households and businesses that are far too little used for investment in property. The state must skim off these surpluses and give them back to the economy as a whole. And finally, the European Central Bank is relieving the euro states of borrowing money with its bond purchase program related to the pandemic to the amount of 1.85 trillion euros.

Does this mean we can and should abandon all borrowing restrictions? How can we prevent government deficits from spiraling out of control and the debt burden from becoming overwhelming, as it has in the past?

No, we need the golden rule again, that is, debt-financed public investments. Indeed: The earlier legitimate distrust of public investment policy must be dismantled. In the past, all sorts of things, by far not just future investments, were financed with debt. This must not be repeated. The key is that we don’t discuss how much debt we can run up, as we have done in recent years, but rather what we spend the money on: for investments that will benefit future generations, or for our current consumption?

Max Borowski spoke to Rudolf Hickel

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