Social peace in Europe requires a return to budgetary discipline
The writer is president of the Bundestag and former German finance minister
“In the long run, we are all dead,” wrote John Maynard Keynes 98 years ago. He believed that short-term economic intervention was necessary in times of crisis to stabilize the economy. New stimulus packages, including the EU’s post-pandemic recovery fund, are part of this tradition. I was in favor from the start – to the surprise of some.
During my tenure as German Minister of Finance, I had a reputation for frugality on principle. However, then as now, my goal was sustainability: borrowing in times of crisis to stabilize the economy makes sense, as long as the issue of repayment is not forgotten. The need to pay off debt later is often overlooked. Many governments focus on the “easy” part of Keynesianism – borrowing – and then delay paying off their debts. This leads to a continuous increase in sovereign debt. Sooner or later inflation is looming. Keynes saw this as a major threat, citing its potential to “overthrow the existing base of the company”.
Currency values are under pressure in many parts of the world, including the EU. Here, more than elsewhere, fiscal policy financed by debt is accompanied by monetary measures. The monetary supply in the euro zone has been massively increased, without being adequately compensated by an increase in the volume of goods and services. This reinforces the inflationary expectations of businesses and private households. Thus, the euro zone risks a currency devaluation which could take on an almost unstoppable dynamic.
Already, the consumer price index exceeds the European Central Bank’s benchmark “lower but close to 2 percent”. Central bankers are not the only ones to be alarmed. Keynesian economic experts like Larry Summers or Olivier Blanchard deplore the crossing of red lines on public debt and point the finger at the increased probability of runaway inflation. In real estate, stocks and works of art, the danger is already acute. The asset price index rose 6.3 percent last year. Indeed, quarterly growth rates have even reached double digits. A significant part of the monetary surplus created by the ECB is obviously invested in the capital or real estate markets and fuels speculative bubbles.
It is not a simple economic problem. It also creates risks for the social fabric. Most of the lenders to the states are wealthy individuals and entities. Public loans increase their wealth, widening the gap between rich and poor. Keynes once warned that profiteers would become the object of hatred. Now, the gulf between the “haves” and the “have-nots” poses a huge threat to social cohesion.
We must therefore return to monetary and budgetary normality. The burden of public debt must be reduced. Otherwise, there is a risk that the Covid-19 pandemic will be followed by a “debt pandemic”, with dire economic consequences for Europe. With their aging populations, EU countries will find it difficult to compete with the United States and China in terms of productivity and competitiveness if they allow excessive leverage to compromise their financial flexibility. Thus, all members of the euro area must engage in efforts to return to tighter budgetary discipline.
Experience shows that balanced budgets in heavily indebted countries are almost impossible to achieve without external pressure. Left to their own devices, the members of a confederation of states risk succumbing to the temptation to take on debt at the expense of the community. I have repeatedly discussed this “moral hazard” with Mario Draghi. We have always agreed that, given the structure of the European Monetary Union, competitiveness and sustainable financial policies are the responsibility of the Member States.
I am sure that he intends to defend this principle as Italian Prime Minister. This is important for Italy and the EU as a whole. Otherwise, we will need a European institution with powers to enforce mutually agreed rules. This would require amendments to the treaty. However, even without such amendments, the European Commission takes on more importance in this area.
A promising approach for Brussels would be a eurozone debt repayment pact, similar to the sinking funds devised by Robert Walpole and Alexander Hamilton. As first Secretary of the Treasury, Hamilton forced the new American states in 1792 to post good guarantees, practice fiscal discipline, and reduce their debts. It was the crux of the oft-cited “Hamilton moment”, not the debt pooling sometimes recommended for the EU.
The debt repayment plan worked and could work again today. He proposes a mixed “carrots and sticks” strategy like that pursued by the IMF – another legacy of Keynes. I am convinced that Europe will be wise enough to also follow the British economist in this aspect of his doctrine.