Newsletter: From debt brake fetish to general enthusiasm for reform – Short Cut with Achim Truger, Katja Rietzler, Peter Bofinger, Florian Schuster-Johnson on 11 December

Dear friends and colleagues, 

If you want to understand what societal paradigm shifts are, you can learn a lesson from Germany right now. At least when it comes to debt and debt brakes. Barely more than a year ago, it was considered a foregone conclusion that the debt brake was sacred and would not be reformed in the next 100 years – and that people did not want this either. Today, there is hardly a once orthodox institution that is not in favour of reforming it – as even the Bundesbank did this week – in order to be able to finance some of the enormous spending needs with additional loans. Its ´untouchability` has now become the unique selling point of a single small party.

British economist Michael Jacobs once analysed, based on historical experience, what is needed for such a paradigmatic, far-reaching change. Among the decisive factors are the fact that the reality and aspirations of the old paradigm are increasingly diverging; new ideas; moments of crisis; political opportunities.

There has been an international consensus among economists for many years that the zealous pursuit of technocratic debt rules does more harm than good. The fact that the debt brake is not the best way to make the country future-proof also became apparent in Germany some time ago – just not yet for everyone. The moment of crisis came with the Karlsruhe ruling in autumn 2023, which revealed that the country’s investment needs could not be met by saving. And political expediency set in when CDU state premiers began to realise what a catastrophe the debt ban was threatening to cause at state level.

Surveys, parts of which we have already published – and the details of which we will present shortly – show how public opinion has already changed. According to these surveys, a large majority of people in Germany now agree that it is a good idea to finance investments through higher borrowings.

What is missing is a consensus on what exactly the reform should look like. The ideas here go in all directions, towards special funds or technical adjustments. However, the lack of far-reaching ideas is not surprising when it has been postulated for so long that there would be no reform in Germany in 100 years anyway. An erroneous prediction that can only be explained by a lack of understanding of the inherent dynamics of paradigm shifts.

We have tried to contribute to the debate in one way or another in recent years – with studies that we have commissioned on possible reforms to the debt brake, most recently with Tom Krebs. On Wednesday, we will discuss the status of reform ideas in our last New Economy Short Cut of the year: with input from Achim Truger, who will present the latest reform proposal from the German Council of Economic Experts, and with contributions from Peter Bofinger, Katja Rietzler and Florian Schuster-Johnson – one hour digitally, on 11 December from 4 pm.

Incidentally, part of the dialectic of paradigm shifts has always been that there are those who want to go back a long way, contrary to what seems obvious. Which brings us to the libertarian Argentinian President Javier Milei and his fans, who want to show once again that everything would be better if state services were simply radically cut – a strange idea when a large part of the problems clearly stem from relying too much on markets and too little on sensible public services. Less won’t help. Only better will help.

Have a good weekend,

Thomas Fricke

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