Debt Brake: Are We Ultimately the Stupid Ones for Being Frugal?

It has been a while. But I can't get the question out of my head: “When will austerity in Germany pay off?” she wrote above a graph shown at a web conference. The evolution of the debts of the G7 countries can be seen below. In all countries except Germany, the national debt was higher last year than in 2010 (see chart above).

At that point, the speaker simply left the question hanging in the air without answering it. But more and more I have the feeling that the answer is “never.” Just look at the reports from the last few days: France has a budget deficit of 5.5 percent and a debt ratio of 111 percent of GDP. Italy recently assured that the rate would “certainly” remain below 140 percent, at least this year. How calming! The United States has a huge budget deficit of more than six percent of GDP, but its economy is booming. Attracted by the prospect of subsidies (and, of course, good terms), companies around the world, such as chip makers, are investing there.

Debt brake discussion

In Germany, however, the Minister of Finance, Christian Lindner, defends the debt brake, for example recently in a television talk on “Carmen Miosga”. The debt brake persists, the State has a spending problem and not an income problem, social spending must be limited, for example with citizens' money, is the mantra of the FDP leader. The insistence of economist Jens Südekum (SPD) in favor of a “reform” of the debt brake also bore no fruit: “Today's debts are tomorrow's tax increases,” the minister responded.

Clemens Schömann-Finck is a financial expert and is behind the YouTube channel “René wants profitability”. In his FOCUS Online column he highlights current issues related to the stock market and investing. He subscribe to his newsletter here for more financial information.

In principle I agree with Lindner. There is enough money and tax revenues are at record levels. Recently, the Federal Statistics Office reported that the revenues of federal, state and local governments reached almost 900 billion euros in 2022, an increase of 7.5 percent compared to the previous year. On the other hand, we spend a lot of money on things that cannot necessarily be described as investments for the future.

But unfortunately there is little progress in terms of savings. The parties agree on their objectives (is there anyone who calls for more bureaucracy or worse education?), but not on the way to achieve them. And while we are locked down, the states around us are creating facts. Nobody thinks about saving there.

Euro states in a community of shared destiny

This wouldn't bother me if I wasn't afraid that we would end up being stupid with our direction. Because let's think more: will we be rewarded if everyone around us goes into debt, but we remain the masters of saving? I don't believe it. Because we are linked with France, Italy and other countries through the euro in a community of shared destiny. It is not that each country has to serve its own “debt soup.” If debts get out of control in a euro country, everyone is involved.

I still remember what it was like during the Greek crisis. Rescue packages were implemented and guarantees provided, and Germany was always at the forefront as the economically strongest country in the eurozone. And it is an open secret that in its monetary policy the ECB not only pays attention to the evolution of inflation, but also to the national debt. There is a whole package of measures to help indebted countries. I especially like the Transmission Protection Instrument (TPI), which allows the ECB to buy government bonds in virtually unlimited quantities. Prerequisite: “unjustified and disorderly market developments” disturb the monetary policy of the ECB. This means nothing more than that the interest costs of debtor countries are skyrocketing and the ECB has to save them.

Therefore, my wish would be that the government would think about reforming the debt brake. Debt is not inherently bad if the money is invested wisely. Of course, going into more debt to increase social benefits is crazy. But I don't think it's wrong to borrow money to invest in better infrastructure and thus improve local conditions. For example, I once heard this suggestion: for every euro you save, you can invest five. That doesn't sound bad to me. It is sad but true: it is of no use if we alone raise the flag of a sound financial policy and no one else clings to it. Either we will be left behind economically or we will have to play the role of saviors.

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