Germany will make it unconstitutional to take on debt. That’s like no sex without marriage.
From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all.
The intention is noble and redeeming but somewhat a tad over the top. Especially in light of the coming years where investments will no doubt be crucial. Wolfgang Münchau sees two possible scenarios:
I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.
To meet the interim deficit reduction goals, the new government will have to start cutting the structural deficits by 2011 at the latest. There is clear danger that the budget consolidation timetable might conflict with the need for further economic stimulus, should the economic crisis take another turn for the worse. There is still economic uncertainty. Bankruptcies are rising, and the German banks are just about to tighten their credit standards again. I simply cannot see how Germany can produce robust growth in such an environment, not even in 2011. If that scenario prevails – as I believe it will – the new constitutional law will produce a pro-cyclical fiscal policy with immediate effect.
One could also construct a virtuous cycle – the second outcome. If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.
There is the good chance that this will collide with France’s view on how to view deficits.
Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany’s lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.
Germans are loath towards credit cards and some feel deeply prickly about debt. You just avoid it, it’s bad for your personal standing and stuff.
While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. Der Spiegel, the German news magazine, had an intriguing report last week on the country’s young generation. One of the protagonists in its story was a young woman who had borrowed a little money to set up her own company. The company turned out to be a success, and she had began to repay the loan. And yet she said she had not felt proud of having taken on debt.
This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.
