Dusseldorf The incumbent federal government is facing what is probably the greatest economic and financial policy challenge in post-war Germany: the consequences of endangering the energy security of the world’s fourth-largest economy. The sudden energy shortage and the rapidly increasing prices could call into question the future viability of Germany as an industrial location. In the event of a severe recession, which cannot be ruled out, with rising unemployment, social peace is at stake.
In view of these risks, it should be the order of the day for the government to dutifully avert serious damage from the German people. What is needed is therefore a clear course committed to three goals.
First, the tough stance against Russian President Vladimir Putin must be maintained and the rapid decoupling from Russian energy accelerated. Secondly, Germany’s energy supply needs to be stabilized, and thirdly, it is important to provide targeted relief for those in need – in other words, the exact opposite of instantaneous aid such as fuel discounts, nine-euro tickets or energy money.
Should there actually be blackouts next winter, when the last three functional nuclear power plants are taken off the grid, this will probably result in irreparable damage to the image of the government and the parties supporting it – and rightly so.
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There is no doubt that the energy crisis is costing the state a lot of money. The population must be protected from unacceptably high energy prices. It is also necessary to finance the arms deliveries to Ukraine. In short: The state is facing an emergency situation similar to that of a severe natural disaster or a pandemic.
The high energy costs are causing problems for both the citizens and the state.
(Photo: dpa)
Nevertheless, Federal Finance Minister Christian Lindner (FDP) insists like a mantra to comply with the debt brake again from 2023. The federal government should then – adjusted for economic effects – not be allowed to incur more than 0.35 percent of new debt in relation to gross domestic product, i.e. around 14 billion euros. In fact, however, the fiscal policy leeway is much greater: thanks to reserves and side budgets.
Credit is not inherently bad
Now the basic idea of a debt brake is undoubtedly correct: a solid financial policy increases the resilience of the state, making the community more resistant to external shocks and smoothing out the fiscal burdens over time.
That is why, in spring 2009, the federal and state governments wrote into the Basic Law, with rare agreement, that after a lengthy adjustment phase, almost all government spending should be financed from current income. The debt brake may be suspended in the event of special events such as natural disasters or severe recessions. However, the additional debt then incurred must be repaid on schedule, which limits the financial leeway in the post-crisis period.
Now, credit per se is not a bad thing. As early as 5000 years ago in Mesopotamia grain seed was lent to small farmers, which they had to return after the harvest plus interest in the form of a larger quantity of grain. Only this credit business made it possible for many farmers to earn a living for themselves and their families.
Today, home loans allow young families to live in their own homes for most of their lives. Without the possibility of going into debt, one would have had to save for one’s working life in order to then be able to purchase a property in old age, which would primarily be enjoyed by the heirs.
Very few young families could afford to own a home without a loan.
(Photo: picture alliance/dpa)
The crucial difference between lending to individuals and lending to governments or permanent companies is that governments and corporations can replace maturing debts with new loans as a result of their “immortality” at maturity. As long as their permanent existence is not in doubt, they only have to generate interest from their current income. Nobody would think of demanding that traditional, profitable corporations – such as RWE or Mercedes – reduce their debt capital ratio to as close as possible to zero.
Just as there is no universal optimal debt ratio for economically healthy companies, there is no optimal debt ratio for states. A ban on state borrowing would be “similarly nonsensical to banning private individuals or companies from borrowing,” wrote the German Council of Economic Experts in a 2007 report for the federal government.
It is not very clear that there are no concerns if the German car industry is allowed to finance the switch to e-mobility with loans, but the state is prohibited from doing so in the intended decarbonization. If the energy transition succeeds, future generations will benefit from clean, cheap and unlimited energy sources.
More Handelsblatt articles on the debt brake:
It is not clear why they should not also bear part of the costs in the form of a government debt service. Even convinced liberals would hardly dispute this.
Certainly, a lot of political swindling has been done with the term “investments”, which has a positive connotation. Exploding costs for public construction projects are just as little evidence of well-invested tax billions, as are more qualified and well-paid daycare or clinic staff evidence of wasteful state consumption. Investments are therefore just as little good per se as state consumption is fundamentally bad.
When viewed soberly, the decisive question should be whether the debt is sustainable in the long term. It is not about the level of the deficit or debt ratio, but primarily about the question of whether the interest payments due can be serviced from current income without any problems. This applies equally to companies and states.
Ultimately, therefore, the soundness of a state budget is determined by the interest-tax ratio, i.e. the share of interest expenditure in tax revenue. There is therefore much to be said for tying a statutory upper limit for deficit and debt to this ratio. While this ratio was around 15 percent in Germany in the mid-1990s, it is currently less than five percent, despite Corona and supplementary budgets.
Higher interest rates will be reflected in the federal budget
In order to break the inflation expectations, the ECB will certainly raise the key interest rate further, which will also have an impact on the federal budget in the future. But the federal government rightly used the (too) long phase of low interest rates to secure its financing in the long term, for example through ten or even 30-year government bonds.
It will probably be many years before this turnaround in interest rates is reflected in the national budget to the relevant extent. This means that there is sufficient time to adapt government spending to this development.
Such a debt brake based on the interest-tax ratio would be a much wiser option than the current rule, because it would be directly related to fiscal policy room for manoeuvre. The SPD, Greens and FDP, on the other hand, want to spend more money, forgo tax increases and stick to the wrongly designed debt brake. You can write that in a coalition agreement, but such a lie cannot form the basis of responsible government policy.
A clever Federal Minister of Finance should actually recognize this.
More: Not enough money for future projects – the economy is dissatisfied with the new financial plan.