About the debt brake, KfW and the traffic light coalition

Lars Feld advises against making public investments in climate protection or digitization through the Reconstruction Loan Corporation (KfW). A KfW transformation fund is a mistake. “Because – most of the people in the current debate do not seem to be clear – investments are something other than subsidies,” said the director of the Walter-Eucken-Institut to the Handelsblatt. “Should the state then prohibit companies from distributing profits so that the money can also be used for investments?”

In the context of the coalition negotiations between the SPD, the Greens and the FDP, there are considerations of using KfW to finance the necessary investments if the debt brake is retained.

Alternatively, KfW could secure loans with government guarantees so that companies can borrow more cheaply and thus invest more easily. “I think that makes sense to a certain extent,” explained Feld. But that is only clever to a limited extent.

Feld considers the idea that KfW could invest directly in companies to be dangerous. “By now it should be clear that the state is not the better entrepreneur and that such approaches do not help with challenges such as climate protection, because they create obstacles to innovation and are cumbersome.”

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As a means for financial leeway, he sees an expenditure revision as well as the possibility of creating a reserve for the next year. Then the debt brake is still suspended because of the corona pandemic. However, constitutional lawyers had criticized this proposal. Feld replied: “That is a question of proportionality.”

If all public investments were to be managed through this reserve, an amount in the mid three-digit billion range might have to be set aside in the coming year. That is not feasible. “If the reserve were only part of the measures to mitigate the consequences of the pandemic, this could be constitutional,” said the former chairman of the economy.

Read the whole interview here:

Mr. Feld, do you have any hope that the massive investments planned by the SPD, Greens and FDP can be financed under the debt brake?
Despite the debt brake, there is financial leeway. But we don’t need to fool ourselves: the debt rule restricts the financial policy room for maneuver. So it will be important to set the right financial priorities in order to make these investments.

KfW could use the possible traffic light coalition for this. A good idea?
That all depends. KfW could use state guarantees to secure loans so that companies can borrow more cheaply and invest more easily. I think that makes sense to a certain extent. Leverage fantasies like the Juncker plan, with which the EU wanted to mobilize 15 times the amount of public funds made available, are, however, unsuitable. Rather, the banking system must be put in a position to grant loans to companies for transformation.

Instead, KfW could be converted into a transformation fund and directly support companies with climate protection investments.
A KfW transformation fund would be a mistake. Because – this does not seem to be clear to most in the current debate – investments are something different from subsidies. If the state makes money available to companies directly through KfW, that is by no means an investment. Should the state then prohibit companies from distributing profits so that the money can also be used for investments? In addition, providing KfW with state funds in addition to the budget is more than delicate. Something like this must always be assigned to a clear objective. Climate protection itself is too vague for that.

Alternatively, the state could step in directly and act operationally.
I don’t see any reason that would help. Up until the 1990s, the federal government took a lot of effort to get rid of its industrial holdings. It should now be clear that the state is not the better entrepreneur and that such approaches do not help with challenges such as climate protection, because they create obstacles to innovation and are cumbersome. Partial nationalization of German industry, nothing else describes this approach, is not a solution.

Companies like Deutsche Bahn could make directly loan-financed investments in the infrastructure. The state would not need to intervene in the first place, it is already the owner.
The route through public companies is feasible, but it has to become more practical. First, approval processes take far too long. Far too much time goes by until a company like Deutsche Bahn has implemented such programs and, for example, new rails are actually laid. Second, there are not enough public companies at the federal level to implement a significant share of the investment. For social housing, for example, the Federal Agency for Real Estate Tasks may come to mind. However, it has no competence in social housing. That has to be planned and implemented at the municipal level, the federal government cannot do that in a meaningful way.

If KfW is only supposed to secure loans, and only to a limited extent: How should investments then be financed?
In addition to an expenditure revision, there is still the option of creating a reserve for the next year. Then the debt brake is still suspended because of the corona pandemic.

You recently made this proposal together with DIW President Marcel Fratzscher. However, constitutional lawyers have serious concerns that this is constitutional. FDP boss Christian Lindner called the approach “dubious”.
It is correct that the emergency clause only allows indebtedness beyond the debt brake if its purpose is to mitigate the coronavirus consequences. But that’s exactly what the reserve would be intended for. Investments, whether in climate protection or digitization, would do just that because they would support the upswing.

The lawyers consider this to be too far-fetched.
It’s a question of proportionality. If all public investments were to be managed through this reserve, an amount in the mid three-digit billion range might have to be set aside in the coming year. That would certainly not be feasible. If the reserve were merely part of the measures to mitigate the consequences of the pandemic, this could be constitutional.

More: ESM rescue fund wants to raise European debt limit.

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