Opinion
Former central bank chief Draghi recommends that the European Union take on joint national debt. The German Federal Ministry of Finance rejects the idea. Our author thinks that’s too reflexive.
The groundhog greets us almost every day, mostly from Berlin, most recently from Brussels. Mario Draghi, Italy’s ex-Prime Minister and former head of the European Central Bank, advises the EU to take on new debt. The European Union should borrow money on the financial market, immediately pump it into its economy and thus stimulate it. That’s right, say some, but it’s a disgrace, say others, including Christian Lindner. “Germany will not agree to that,” announces the finance minister. Who is right?
Honest answer: It depends. Firstly, what the borrowed money is used for. And secondly, it depends on nothing less than a basic political stance – which you could almost call a question of faith.
National debt has been considered dangerous in Germany for at least 100 years. Too much of it can lead to horrendous inflation, the weakening or collapse of currencies, and national bankruptcy. All of this is true, and has happened time and again in the world, but it is extremely far removed from the current situation in Germany. Nevertheless, our understanding of debt is deeply influenced by it. Debt is seen as a burden. And people don’t like it. A view that can be helpful in private life would have fatal consequences for the state if it were strictly followed.
What is good, what is bad?
Economists consider it reprehensible to use state loans to pay for ongoing social services such as pensions or basic security against poverty. This is because the borrowed money would simply be used up. Nothing of value or further use for the community would remain. Apart from interest and repayment. Bad debt.
In contrast, most economists think that government debt is a good thing, for example for the construction and repair of infrastructure, such as waterways, railways and roads. This is because the whole of society benefits economically from this over a long period of time. This should make it easier to pay interest and repay such loans. Good debt.
There is a great deal of agreement on this simplified view of good and bad. This also applies to Berlin. If it were up to Christian Lindner, the liberal Federal Minister of Finance, this would say almost everything about national debt. In this way of thinking, a special loan to revive the German army is fine. The huge sum that something like this costs cannot be paid for from annual tax revenues alone. And everyone should benefit from it in the long term, namely more external security. So good debt. From a purely economic point of view. Everything else, according to the radical liberal attitude, the state should pay for with the money it receives from taxes. So more debt is bad debt? Not necessarily.
Debt as a boost
The ultra-liberal, and in some places conservative, understanding of debt has a catch: if the economy stagnates for a long time, the state collects less tax. An economic crisis can then expand into a social crisis. This is precisely where the basic political attitude comes into play: while economic liberals in such situations rely on state austerity – Lindner calls it “prioritization” -, reducing bureaucracy and even tax cuts to revive the economy, economists from Mario Draghi’s school of thought also recommend additional debt, specifically to stimulate the economy.
Such loans could be repaid at a reasonable cost in better times. And if such start-up financing were to be used for economically promising projects, such as ecological modernization or digital infrastructure, there would be enormous long-term benefits for everyone. And there you have it: it can be good debt.
National debt: The German dilemma
This is exactly the path that the US government under Joe Biden has taken, for example. Christian Lindner also went along with it, both intellectually and politically. Until the Federal Constitutional Court rudely stopped him and his coalition partners: the way they handled some special loans was not legal. And so good debts became bad almost overnight. The Federal Republic is only allowed to take out loans above a self-imposed limit in precisely declared emergencies, in mega-crises. This is called the “debt brake”.
Mario Draghi sees the European economy, and the German economy too, in a dire situation, namely being left behind by the USA and China. For Christian Lindner, at least so far, there is no reason to take on more debt. Not a good one either. Tough, almost daily arguments about the distribution of limited tax revenue are on the cards. Much to the chagrin of his coalition partners from the SPD and the Greens. And now?
Either there will be a two-thirds majority in the Bundestag that will reform the constitutional debt brake, as was done when it was introduced 13 years ago. In the short term, this is very unlikely. Or the faltering economy, and ultimately all of us, will have to cope with international competition largely without new state start-up loans. The outcome is uncertain. Viewed in this light, Mario Draghi’s idea of taking on good debt as a European Union may not be such a bad idea. At the very least, a Federal Finance Minister should not simply dismiss it.
Source: Stern
