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How the Germans are shooting themselves in the foot again Defending against the competition: Zoom exceeds expectations

The German Federal Constitutional Court’s debt brake ruling threatens the achievement of climate goals – and the economy.

Jens Südkum, professor of economics at the University of Düsseldorf, puts it in a nutshell: “The debt brake is the biggest mistake in German economic policy in thirty years. And the stupid thing is: it’s in the constitution and we can’t get rid of it.”

To understand this harsh statement from the economist, we need to take a quick look at history.

Before World War I, the gold standard dominated the international currency markets. In short, you can say that this was an extreme form of debt brake. Because the individual currencies had to be backed by gold, the national banks were not allowed to use the printing press.

During the First World War, Germany, France and Co. sleepwalked, as the Australian historian Clark describes in his book. Years of mutual slaughter with millions of deaths were not planned; what was planned was a short slog. Therefore, this war was not financially safe and was therefore financed by the printing press.

The Germans’ eternal fear of inflation

In Germany, the economic result was devastating hyperinflation in the early 1920s. Britain, which reintroduced the gold standard against the strong advice of the leading economist of the last century, John Maynard Keynes, paid for this with a prolonged economic crisis.

So far the story, now to the present:

At the beginning of this century, Germany was doing poorly economically. Yes, it has even temporarily replaced Italy as the ‘sick man of Europe’. High unemployment rates and high government debt made Germans fear a new hyperinflation. That is why the debt brake was introduced in 2009, based on the Swiss model.

For the Germans the calculation was correct. Thanks to the euro, they had a weak currency and quickly became ‘world export champions’. Thanks to the debt brake, the inflation risk was averted. The other members of Euroland were less happy. After the euro crisis, Germany imposed austerity policies that gripped their economy for years. They didn’t find it particularly funny that the Germans were bragging about their “black zero” in the national budget and rubbing Angela Merkel, the emblematic, frugal Swabian housewife, in their faces as a role model.

After years of suffering, even the Germans saw the nonsense of their austerity policies. Then came the Corona crisis and then the war in Ukraine, which caused energy prices to explode. This was no longer possible with a normal budget. The government therefore declared a state of emergency, allowing it to temporarily suspend the debt brake.

Today it is also important to achieve the ambitious climate goals, which require additional and large financial resources. The war in Ukraine also requires a huge increase in the defense budget. With so-called special funds (don’t ask), another instrument was created that makes it possible to circumvent the rigid corset of the debt brake.

Significantly more loans were approved to combat the pandemic than was actually necessary: ​​about 60 billion euros too much. The traffic light government has allocated these resources to the fund necessary for the ecological restructuring of the economy. For example, we are talking about subsidies for Thyssen to produce ‘green steel’, but also about a ten billion subsidy for an Intel chip factory in Saxony. The German economy has already adapted to these subsidies. Without them she cannot realize the green transformation.

The traffic light government and the German economy did not expect the Constitutional Court. This upheld a lawsuit by the opposition, which labeled the rebooking of the Corona loans as deception and even fraud. From a purely legal perspective this is not entirely wrong, but from an economic and political perspective this ruling is devastating.

It forces the traffic light government to re-spend some of the 60 billion euros already spent or subsequently extend the state of emergency. This is possible, but not popular, especially with the FDP. In contrast to the Social Democrats and the Greens, the Liberals support the debt brake. In addition, the budget for the coming year must be completely overhauled.

There are only bad solutions: tax increases are categorically rejected by the FDP. Cutting back on social spending – the new citizen benefits and child benefits are under discussion – is a no-go for the social democrats. Finally, the Greens emphasize that the green restructuring of the economy must continue.

The Germans’ return to austerity mode is difficult to understand. To finance their Green New Deal, for example, the Americans are allowing a national deficit of seven percent of gross domestic product (GDP) – much more than the Germans. Moreover, the amount of total German public debt is about 60 percent of GDP – significantly lower than that of the US. The French are also enjoying a booming economy, despite significantly higher government quotas and, to the envy of German business bosses.

If they do not want to be left behind, the Germans urgently need investments in their infrastructure and their education system, because they have been criminally squandering this expenditure for years. To save money in these areas would, in a sense, be suicide for fear of death.

Cutting back on social spending is also not a good idea. Do we really want to pursue the dubious goal of a ‘black zero’ again at the expense of the poorest people? In addition to moral concerns, there are also political concerns. An ecological restructuring of society is only possible if the lower classes are also included. This insight has become political knowledge since the French yellow vest protests.

A ‘black zero’ in the state budget, an ecological restructuring of the economy and a sensible welfare state cannot be reconciled – unless one resorts to politically toxic means such as tax increases or cuts in social spending. From a strictly legal perspective, the Constitutional Court may have made the right decision. But it doesn’t do anyone any favors, least of all Germany itself.

PS: And what about the debt brake in Switzerland? We are talking about a chicken-and-egg discussion here. Conservative economists see the debt brake as an important reason for the economic prosperity of recent decades. However, you can also turn the tables and say: because the Swiss economy – which has a different composition than the German one (no car industry) – has been at a consistently high level since the turn of the century, we can also afford an economically pointless debt brake. At the same time, we must hope and pray that we do not enter into a serious economic crisis.

Philipp Löpfe

Soource :Watson

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