April 16, 2019
The beginning of a German debate about the debt brake?
There are commentaries that matter because of what they say. And then there are those that matter because of the person who says it. The commentary by Michael Hüther and Jens Südekum in Süddeutsche Zeitung against Germany’s constitutional debt brake contains no insights for anyone who has followed the fiscal debate even superficially. It is hard to explain - other than through recourse to psychology - why Germany pursues a policy of fiscal surpluses at a time when interest rates are negative and when the public sector infrastructure is in disrepair. In their article they even spend a paragraph explaining why there are circumstances when a country should try to get rid of all of its debts. Readers will be shocked.
What makes this article interesting to us is that Hüther is the chief economist of Germany’s most conservative economic institute - the Cologne-based German Economic Institute, which is traditionally close to the employers. In Germany, you can fit the sum-total of Keynesian economists literally into a single room. We know this for a fact because one of us has once been invited to that room. But Hüther was not there and never will be.
So, what are we to make of this? The debt brake was decided by a grand coalition in 2009 and is effective since 2011. It is a unilateral German fiscal rule that doubles down on and hardens the Maastricht fiscal rules. What matters politically is that it is supported by both the CDU/CSU and the SPD. Subsequent governments over-fulfilled their self-imposed rule. In fact, Germany ended up with larger fiscal surplus than were strictly required under the rule.
Until recently there has been very little debate about the sense and nonsense of such a rule. Even economists considered to be be progressive, like Marcel Fratzscher, defended it - we presume for political reasons. He focused his criticism not on the rule, but on the way it is applied.
This article is different in the sense that it criticises the rule and concludes that it is time to replace it with a more intelligent fiscal framework, one allowing debt financing of investments while retaining a balanced-budget rule for expenditures.