Germany’s debt limit architect calls for new borrowing


The man who invented Germany’s strict limit on new government borrowing called for rethinking, saying the country should raise billions of euros in debt to invest in new technologies, tackle climate change and fix its aging infrastructure.

Christian Kastrop, a former official in the German finance ministry, was one of the authors of the country’s “debt brake”, a constitutional requirement that makes budget deficits extremely difficult for Berlin.

He is now arguing for law reform to correct years of underinvestment and prepare the German economy for the future.

Germany’s policy of strict fiscal discipline generated a series of budget surpluses, but left the country’s physical and digital infrastructure increasingly worn out. Mr Kastrop is part of a chorus of economists, business leaders and politicians who have called on Angela Merkel’s government to loosen the purse strings.

In an interview with the Financial Times, Kastrop called for a multibillion-euro investment agency, backed by private and public funds, that could raise funds in capital markets and use it to modernize l German economy.

“With interest rates so low, there is certainly an argument for setting up a future fund to invest in things like climate protection, infrastructure and digital technology,” Kastrop said. , head of the Europe’s Future program at the Bertelsmann Stiftung think tank.

His comments come as Mario Draghi, who has repeatedly called on governments with healthy budgets to ease fiscal policies, prepares to chair his last monetary policy meeting at the European Central Bank on Thursday. The Italian will pass the baton to Christine Lagarde at the end of the month.

Mr Kastrop said the future fund could be structured as a private entity in which the German state had a large minority stake, he suggested. “With the state as a shareholder, borrowing costs would be kept to a minimum,” he said.

The yield on German 10-year bonds is currently minus 0.4 percent.

However, he acknowledged that this would be “politically sensitive” as most of the major German parties are committed to balanced budgets. “Any finance minister who created a future fund would first be accused of trying to manage a shadow budget,” he said.

Mr Kastrop’s idea echoes similar proposals from other German economists such as Michael Hüther, director of the German Economic Institute in Cologne, who has suggested that public investments be financed from a “budget of” ‘separate investment financed by debt’.

Meanwhile, Marcel Fratzscher, director of the German Institute for Economic Research, called for the debt brake to be replaced by a “nominal expenditure rule” that links public spending to economic performance, as well as the obligation. for governments to seek positive net investments over the medium term.

The debt brake allows the federal government to take out new loans up to the value of just 0.35% of gross domestic product, adjusted for the business cycle – currently around 12 billion euros. It was introduced in 2009 to prevent public debt from rising in the wake of the global financial crisis and at a time when concerns about demographic pressures on the German welfare state were mounting.

Mr Kastrop said it had “worked well”.

“It has certainly made the government and parliament more disciplined when it comes to spending and helped put public finances on a more sustainable basis,” he said.

The rule continues to enjoy broad support among experts. A survey of 120 leading German economists released this week by the Ifo Institute found that 64 were in favor of maintaining the debt brake, while 31 wanted it abolished.

But Ms Merkel’s conservative-led government has gone even further than the debt brake by pursuing a policy of zero new borrowing and balanced budgets – known in Germany as the schwarze Null or black zero.

Aided by a 10-year economic boom, the policy had left Germany “a lot of fiscal leeway,” Kastrop said. “But successive governments have just used this to reward their supporters with political giveaways rather than investing in the future – in technology and innovation.”

In fact, 48% of economists in the Ifo survey were opposed to the schwarze Null political, with only 34 percent supporting it.

Mr Kastrop said he was now in favor of relaxing the debt brake rule by tying it to Germany’s debt-to-GDP ratio. This percentage has declined in recent years and now stands at less than 60 percent.

This link would mean that “if the debt-to-GDP ratio fell below 50%, the 0.35% limit on new borrowing could drop to, say, 0.7 or even 1.0%,” he said. he declares. Likewise, if the debt ratio increased again, the previous limit of 0.35% could be reinstated.

But Mr Kastrop conceded that the German constitution would have to be amended to change the debt brake rule – a very complex process that requires two-thirds majorities in both houses of the German parliament.


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