Re-live: Good Money - A Question of Political Will? With Philippa Sigl-Glöckner and Stefan Kolev

There are plenty public financing needs: whether in kindergartens, climate-friendly facilities, care homes or research centres. The only problem is a lack of money, they say. Really? Or is this more a question of political will? And how can we determine what would be good for society? We talked about this in our New Economy Short Cut with Philippa Sigl-Glöckner, who addresses this very issue in her recently published book ‘Gutes Geld – Wege zu einer gerechten und nachhaltigen Gesellschaft’ (‘Good money – ways to a fair and sustainable society’) – and with Stefan Kolev from the Ludwig Erhard Forum.

According to Philippa Sigl-Glöckner, the ability to deal with political objectives has been lost in the financial policy debate due to the reliance on rigid, technocratically defined debt rules. In order to put financial policy back at the service of society, it is necessary to understand the nature of money as a social institution, she argued. Money is not ‘good’ or ‘bad’ per se, but something that is significantly influenced by government decisions. Although money creation should be kept within certain limits, it should ultimately serve societal and political goals such as freedom and equal opportunities. In her opinion, the German debt brake in its current form does not offer sufficient room for manoeuvre to achieve socially desirable goals (e.g. climate protection, education, infrastructure development). Using the Maastricht criteria, Sigl-Glöckner pointed out that historical dynamics have led to debt rules that are not economically justifiable. For example, the recently published Maastricht negotiation protocols show that the maximum debt ratio (national debt/GDP) of 60% is not based on any scientific evidence and was introduced at the time purely as a provisional measure, she explained.

From Stefan Kolev‘s point of view, the historical negotiations of the Maastricht criteria gave rise to a certain justification. In his commentary, he emphasised the political-economic justifications for strict fiscal rules. As politicians generally favour consumption over investment spending in order to win over voters, strict limits are indispensable. According to Kolev, the debt brake increases the pressure to prioritise the national budget and thus ensure efficient use of resources and long-term investments.

The discussion centred on the tension between strict fiscal rules and the flexibility required to achieve social goals. Both agreed that there is currently a lack of investment in key areas of the economy, but disagreed on how public financial needs should be met.

As an alternative to the debt brake, Sigl-Glöckner proposed context-dependent fiscal rules. The German federal government could, for instance, follow New Zealand’s example and establish a debt rule that is decided in the political process and whose effect is reviewed by an independent scientific institution. This would create more transparency and increase the democratic legitimation of fiscal policy. An investment rule would also be desirable in order to limit the aforementioned political-economic problems of public debt.

Kolev was sceptical about reforming the debt brake and introducing an investment rule. In his opinion, this would trigger an almost insoluble discussion about the concept of investment and pave the way for future finance ministers to falsely declare consumer spending as investment. In order to cover the financial requirements, he advised structural reforms along the lines of the welfare state reforms in Scandinavia during the 1990s.

Sigl-Glöckner argued that the debt brake is no longer up to date. For example, the concept of ‘natural unemployment’, which is based on the historical female labour force participation rate when calculating production potential, contradicts the social goal of equality. The role of politics is to adapt the budget rules to changing social objectives.

She argued in favour of a better distinction between expert questions and those economic questions that require political deliberation within the democratic process. In this case, the fundamental decision on whether the assumption of a low female labour force participation rate in the fiscal rules is politically desirable should be discussed openly in the political process instead of leaving this to technocratic committees. In turn, economics would play an important role in solving expert questions, such as realistically mapping the actual labour force potential.