Plea for a global debt brake

Since the beginning of the corona pandemic, financial measures to maintain the economy and employment have been financed worldwide primarily through government borrowing. One can only hope that the trend will reverse as the Omicron variant dies down. The increase in public debt is just as justifiable this time as it was in 2008/09. At that time, the aim was to get the consequences of the global financial crisis under control. In the meantime, however, national debt has reached peak values ​​worldwide. This also applies to the private sector, which doesn’t make things any better.

If one could assume that the world would be spared housing bubbles and new pandemics in the coming decades, for example, there would be no cause for concern. The mountains of debt would be cleared. But that assumption would be naïve. It is more likely that the next crisis will come during or after the corona pandemic – such as Russia’s already launched attack on Ukraine with the threat of a wave of refugees, crashing real estate markets, escalating global trade conflicts or more dangerous virus variants. The next global crisis may not be far off.

Are we prepared for this in budgetary terms? Or is the world running into a debt trap? One thing is clear: Global liabilities have increased more than at any time since the end of the Second World War. This is shown by the figures from the International Monetary Fund: In 2020 alone, the first year of the crisis of the corona pandemic, global debt increased by 28 trillion to 226 trillion dollars. The biggest debt makers are not emerging and developing countries, but the dominant economies – above all the USA, China and Japan.

The interest rate policy of the ECB feeds illusions

In Europe, the deficit kings are countries that were already heavily indebted: Italy, Spain, Portugal, Belgium and France. For several years now, and even more so since the beginning of the pandemic, the European Central Bank (ECB), with its low-interest rate policy and massive purchases of government bonds, has been creating the illusion of being able to finance increasing public spending without structural reforms in the long term without risk. In addition, the financial development of Europe is reflected in many ways around the world. Therefore, the question that arises with all urgency is: where is budgetary policy headed with a view to future challenges? Is there still an understanding of debt sustainability at all?

According to the criteria of the Maastricht Treaty, the members of the euro zone must limit their national debt to a maximum of 60 percent of their respective gross domestic product (GDP) in “normal” times. The reality is of course different. The head of the European Stability Mechanism, Klaus Regling, is now calling for the limit to be raised to 100 percent of GDP. We have already achieved this on average in the euro countries.

It is therefore likely to become increasingly daring to counteract future dangers with a “politics on credit”. 100 percent as the new debt limit? As long as interest rates remain at historic lows, even that seems reasonable. But the time will soon come when interest rates will be shaped by the market again.

We won’t get any further with sleight of hand

We must combine the issues of intergenerational justice and sustainability with moral debt sustainability: where is the scope for our children to take on their own debts? Will future generations no longer have a “law of debt”? After all, as many societies age, pension payments and healthcare benefits will require increasing government benefits. In any case, we will not get anywhere with sleight of hand – such as not including the Next Generation EU funding program in the debt statistics.

The pandemic is not over yet, and the economy is still on the road to recovery. But already there are not only climate protection packages worth billions on the agenda – now inflation is also added. There is much to suggest that currency devaluation will hit us longer and cause lasting damage. According to the classic rules of economics, the central banks must take countermeasures, i.e. above all stop buying government bonds and initiate a cautious turnaround in interest rates after the US Federal Reserve and the ECB have flooded the markets with cheap money for years.

A hard turnaround in interest rates would trigger shock waves in the economy, which in many places is still a long way from returning to pre-pandemic levels. However, the central banks cannot simply let inflation run its course either, because otherwise there is a risk of massive social upheaval. Fed Chairman Jerome Powell has already signaled that the US Federal Reserve will raise interest rates several times this year. ECB President Christine Lagarde, who for far too long downplayed the inflationary development as only “temporary”, is also likely to be forced to make at least a slight course correction – if only to prevent too much capital from flowing out of the euro zone to the USA.

Sound fiscal policy is not an end in itself

Against the background of rising interest rates, it is all the more true that the increase in debt must be stopped worldwide in the next few years and the repayment of liabilities must begin. In terms of intergenerational justice, it is important to go back on the path to orderly budgetary policy. It may be that more realistic debt limits than before are required as a starting point. This time, however, higher limits must also be associated with clear financial sanctions for violations of the upper limit, unlike previously in the euro zone.

In addition, every state that is excessively indebted and still claims financial solidarity must accept advice, support and control. Globally, this is the responsibility of the International Monetary Fund (IMF). In the euro zone, the “troika” of IMF, ECB and EU Commission was unpopular, but did a good job.
It is becoming increasingly apparent that the development is aimed at making less indebted countries “liable” for more indebted countries. Debt haircuts and the outsourcing of government debt to “bad banks” also appear possible again.

Sound budgetary policy is anything but an end in itself. In the geopolitical battle of the systems, financial leeway is the basis for future ability to act and compete. One can look forward to the special EU summit of heads of state and government on March 10th and 11th in Brussels: Under France’s presidency, a new European growth and investment model is to be discussed. If it is about a competitive and financially solid Europe, the summit can point the way for the future – and provide impetus for a global debt brake. If, on the other hand, further leverage is opened up, we face a bleak future.

The author: Günther H. Oettinger is President of United Europa eV He was Prime Minister of Baden-Württemberg and EU Commissioner for Energy, Digital Economy and Society, Budget and Human Resources.

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