Forum newsletter: Short Cut on Monday on the historic financial package with Katharina Beck

Dear friends and colleagues, 

Rarely has an economic policy announcement from Germany caused so much international relief as the incoming government’s decision to ease the debt brake and finally mobilize significant public spending not only for defense but also for renewing infrastructure and, as recently agreed, also for climate protection. From an external perspective, it has been difficult to understand why Germans have stoically watched as school toilets rusted, bridges became dilapidated, train travel became a gamble, and there was supposedly never any money for the best investment in the country’s future because it was allegedly more important to adhere to a debt brake.

It is all the more irritating how those who insist on orthodoxy with supposed economic expertise have been railing against the plan, using arguments that have been quite clearly refuted by experience and empirical research in recent years. The idea that fiscal rules are important because they force politicians to set priorities is a nice thought. In practice, however, strict debt limits have repeatedly led to either exacerbating recessions or hastily cutting investments because they are the easiest to cut. This was roughly the opposite of good priorities – possibly even one of the fundamental evils.

The notion that government debt almost automatically leads to inflation? Also not provable. The Japanese have multiplied their debt without a hint of inflation. The idea that debt per se brings higher interest rates – maybe a little, but certainly not a reason to avoid solving fundamental problems. The idea that Germans must be a role model in Europe? A twisted thought. As an end in itself? And a role model for what? For creating dilapidated schools and railways?

Critics also argue that the whole thing only brings short-term growth effects. Also rather strange. Why should it only bring short-term benefits to renovate bridges, reduce the risk of further climate disasters, or invest in schools? A lot of the economics of the 1990s resonates here, when it was common to reflexively declare the state to be the evil of everything.

Now it will be all about ensuring that the money is used effectively – and to meticulously check whether and to what extent the additional investments now being financed lead to solving problems that are troubling the economy. Then, this alone will save a lot of money in the country for repairs, train delays, or the elimination of climate damage. And with targeted use, it will also create lasting economic growth that will make it easier to repay debts. This is much more important for the often-cited next generations than just not spending any money now.

It is not really fortunate to have all this decided now by the members of the old Bundestag – in a combination of CDU/CSU, SPD, and now also the Greens, who neither previously nor in the future will form the government. Professionally and substantively, however, the Germans are only catching up with the easing of old fiscal rules to finance urgent major tasks, which is the state of modern research and knowledge – and has been demanded by international institutions and numerous experts for years. So far in vain.

What impact the black-red-green financial package will have – and how it should now be implemented: we will discuss this at our New Economy Short Cut this Monday, March 17, from 6 p.m. with Katharina Beck, the financial policy spokesperson of the Greens in the Bundestag, Philippa Sigl-Glöckner from Dezernat Zukunft, Armin Steinbach from HEC Paris, and Katja Rietzler from the IMK Institute. “Debt for Germany – What good is the financial package?” Moderated by Mark Schieritz (DIE ZEIT). You can register here.

Until then, you can watch our post-election Short Cut with Dominika Langenmayr, Sebastian Dullien, Holger Schmieding, and Philipp Heimberger with English subtitles here (and the original German version here).

Have a great weekend,

Thomas Fricke

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