Germany’s ‘Debt Brake’ Is an Unnecessary Drag

The Editors

(Bloomberg Opinion) -- Germany’s refusal to use fiscal policy, in the form of a big and quick stimulus, to ward off recession is a serious problem for the global economy. This excessive caution is enshrined in a balanced-budget law known as the “debt brake.” Several other countries have been emulating it, or thinking about doing so. They shouldn’t. And Germany should reconsider the law in a hurry, as a growing chorus of economists and the country’s largest business lobby are demanding.

The debt brake dates to 2009, when Germans blamed the financial crisis on excessive debt, the German word for which happens to be etymologically akin to that for “guilt.” They approved a federal constitutional amendment and changes to state constitutions to outlaw structural budget deficits. The federal government has a bit of wiggle room; the states have none. The only exceptions are for natural disasters or severe recessions.

Such laws aren’t unheard of. In the U.S., almost every state has a balanced-budget rule in some form. Switzerland adopted a debt brake in 2001. The European Union has the Stability and Growth Pact, with ceilings for deficits and debt. But Germany’s law is especially strict. Since its introduction, the Austrians and Spaniards have adopted rules modeled on it.

To Germans, fiscal wisdom is embodied by the proverbial “Swabian housewife,” who is thrifty bordering on stingy. Chancellor Angela Merkel has been known to invoke her. But the housewife runs only one household within a larger economy — an economy that would tank if all its participants suddenly turned frugal. In the aggregate, economies can suffer from deficient demand. When they do, and the government has sufficient room for fiscal maneuver, running a controlled budget deficit supports employment and growth. Under the right circumstances, higher government borrowing can even reduce public debt as a proportion of gross domestic product. Unduly rigid rules foreclose this opportunity.

At the moment, the case for fiscal flexibility in Germany is especially strong. The ill-advised trade war led by U.S. President Donald Trump is putting pressure on the global economy. Much of Europe is slowing down. Germany’s economy has been hit particularly hard, and its plight is compounded by years of anemic investment, in public goods such as roads and bridges and broadband lines. Germany’s debt is low enough to provide ample fiscal space. And the government’s cost of borrowing is now less than zero: That is, lenders are willing to pay the government to borrow their money.

In such circumstances, fiscal flexibility is the prudent choice. At a minimum, Germany should exempt investments, as opposed to welfare spending, from the debt brake. But it might be better to revise the law more thoroughly, or even scrap it altogether. Germany’s suspicion of high public borrowing might be sufficient discipline in itself. In any event, when a policy rule militates against doing what almost everybody agrees should be done, it’s time to think again.

--Editors: Andreas Kluth, Clive Crook.

To contact the senior editor responsible for Bloomberg Opinion’s editorials: David Shipley at davidshipley@bloomberg.net, .

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