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“The absurdity of the debt brake”

For a lot of economists (M. Krugman, O. Blanchard, E. Kelton, almost all Keynesians, there is no limit to the list), the debt limit is an absurdity (see "Olzaf Scholz plots a way around Germany's debt rules" in the FT December 6.) Really? There is always a limit to the debt burden. If the public debt ratios have reached non-sustainable levels for some countries (not yet Germany) without major market disruption, this not because the market is willing to buy the debt of irresponsible countries (Greece, Italy, Spain, France) but because the ECB is buying obligingly TBs (QE) without limit to these fragile countries to maintain artificial low interest rates close to the bund rate. The ECB implicit target is the spread of the interest rates of these countries vis-à-vis the bund rate. Who can believe seriously that the spread between Greece and Germany is today 1.5% whereas the Greek debt ratio is more than 200% of GDP and the Germany’s debt ratio is 70%?

Now the economic argument for raising public debt for Germany is that its debt ratio is relatively weak in relation to other EZ countries (Italy 155%, France 115%) and its investment ratio insufficient in relation to its saving ratios. This is true.

The solution proposed by O. Scholz to go round the German debt rule is nothing new. He suggests going round the German debt straitjacket by asking public enterprises or a public investment bank to finance public debt for the Government (it remains to be seen if the Federal Minister of Finance C. Lindner agrees with that proposition). In effect debts, incurred by a public enterprise or a public bank, are not included in the general government debt according to the economic definition of public debt. All economists who have worked in Africa know how these governments proceed. The central government asks public enterprises to assume debt for them (a part of budget expenditures are transferred to public enterprises). The government “invests” (it spends) and asks the public enterprises to assume the spending and the debt in its balance sheet, so that the limit of the general-government public debt will not increase. This is exactly what is recommended, ask a public-owned bank, KfW to assume public debt for the government. (Needless to say, that the IMF would condemn this practice in Africa).

But after all, since Germany needs more public investment and is not a country with corrupt institutions, why not ask a public bank to finance more public investment instead of the central government and landers? This is not a bad solution. What is important is not the institution which invests but to know whether the investment is feasible from a financial and economic point of view.

If the solutions floated by the German Government are agreed, then expect the Italian, Greek, Italian, French governments to say: me too…me too. The Maastricht rule were momentarily phased out because of the covid crisis, now as usual, the exception becomes the rule.

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