Intermoney | Days ago, Helge Braun, a close associate of Angela Merkel, proposed reforming Germany’s constitutional limit on public debt. This is an issue facing great resistance within key sectors of the CDU/CSU, making it difficult for it to go beyond the status of a mere proposal, but whose mere proposal represents a turning point. In 2009, public deficits were reaching -3.2% of GDP in Germany as a result of the response to the Great Recession and the activation of automatic stabilizers. Therefore the German authorities introduced new mechanisms to ensure the sustainability of public finances. These quickly took effect as the German public deficit narrowed from -4.4% in 2010 to -0.9% in 2009, subsequently transitioning first to budgetary stability and then to surpluses in the public accounts.
The rule in question prevents German regions from incurring budget deficits and limits the structural deficit of the federal government to 0.35% of GDP. A rule that marked a turning point towards the imposition of fiscal austerity in Europe, shaping a very different recipe to that applied in the US to get out of the crisis. And it was also visible in the initial reaction of monetary policy. The reality is that there were countries in Europe where major imbalances and excesses needed to be corrected, although the priority should have been to support a rapid and strong economic recovery. A reality that was not correctly interpreted and which, subsequently, forced us to make an extra effort, especially in terms of monetary policy, which did not save us from obtaining worse results than in the US. The truth is that timely and appropriate action in the fiscal and monetary sphere would have prevented us from being trapped in a world of negative interest rates in the Eurozone today.
The response to the COVID crisis in Europe, led by Germany, is an implicit acknowledgement of past mistakes. And Christian Democrat Helge Braun’s proposal only emphasises that more fiscal flexibility will still be needed to ensure full recovery. The exceptional nature of the situation has meant that the budget stability rule is currently suspended in Germany and is due to be reactivated next year. However, this reactivation seems hasty and the first option is to extend the suspension of the budget stability rule. That said, this would damage its usefulness by undermining confidence in its enforcement. So Braun raised the quite logical question of designing a progressive reduction of the public deficit before restoring the long-standing budget stability rule.
Braun’s approach clashed with the CDU/CSU apparatus and the fiscal orthodoxy that pervades the party and this, for the time being, will not go beyond a mere proposal. However, it is significant that members of some influence in the CDU/CSU are daring to take this step and launch a debate that will explode in the coming months in Germany.
There is widespread agreement in the world that premature tightening of fiscal policy would be a major mistake by undoing some of the great effort that has been made to promote recovery. In 2022, we run the risk that in the EU the suspended fiscal rules will be reinstated and we will move towards a premature and counterproductive fiscal tightening process. At this point, a distinction must be made between the situations of the various countries, and Braun’s proposal that a progressive consolidation path be designed before reactivating the rules previously in force makes sense. The fact of proposing a path adapted to each country’s situation represents an interesting solution. It is halfway between those who advocate a hasty fiscal adjustment and those who want to delay it sine die. For example, in Spain’s case, we should already have a long-term action plan for our public finances so that, in the next crisis, they can be part of the solution and not part of the problem.
The debate launched in Germany will gain momentum after the September elections. The possibility of forcing the German economy into a major fiscal adjustment, as early as 2022, is a mistake when its public debt is under control. In fact, despite the fall in GDP, debt stood at 70% in Q3’20, a reality that will be exposed by the CDU/CSU’s possible governing partner, the Greens. Their proposals are in line with a further increase in spending and do not fit in well with fiscal orthodoxy.