Architect of Germany’s debt limit calls for new borrowing

The man who invented Germany’s strict limit on new public borrowing has called for a rethink, saying the country should raise billions of euro in debt to invest in new technology, fight climate change and repair its ageing infrastructure.

Christian Kastrop, a former official at the German finance ministry, was one of the authors of the country's "debt brake", a constitutional requirement that makes it extremely difficult for Berlin to run budget deficits.

He now argues for reform of the law to correct years of under-investment and make Germany’s economy fit for the future.

Germany’s policy of strict fiscal discipline has delivered a string of budget surpluses but left the country’s physical and digital infrastructure increasingly threadbare. Mr Kastrop is part of a chorus of economists, business leaders and politicians who have called on Angela Merkel’s government to loosen the purse strings.

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In an interview with the Financial Times, Mr Kastrop called for a multibillion-euro investment agency, backed by private and public money, that could raise funds on the capital markets and use them to modernise Germany’s economy.

"With interest rates so low, there is definitely an argument for creating a future fund to invest in things like climate protection, infrastructure and digital technology," said Mr Kastrop, head of the Bertelsmann Stiftung think-tank's Europe's Future programme.

His comments come as Mario Draghi, who has repeatedly called on governments with healthy budgets to loosen fiscal policy, is preparing to chair his last monetary policy meeting at the European Central Bank on Thursday. The Italian will hand over the reins to Christine Lagarde at the end of the month.

Mr Kastrop said the future fund could be structured as a private entity in which the German state owned a large minority stake, he suggested. “With the state as a shareholder, borrowing costs would be kept to a minimum,” he said.

The yield on Germany’s 10-year bonds is currently minus 0.4 per cent.

However he acknowledged it would be “politically sensitive” because most of the big parties in Germany are committed to balanced budgets. “Any finance minister who set up a future fund would at first be accused of trying to run a shadow budget,” he said.

Mr Kastrop's idea echoes similar proposals from other German economists such as Michael Hüther, head of the German Economic Institute in Cologne, who has suggested that public investments be paid for out of a "separate, debt-financed capital budget".

Meanwhile Marcel Fratzscher, head of the German Institute for Economic Research, has called for the debt brake to be superseded by a "nominal spending rule" that ties public expenditure to economic performance, as well as a requirement for governments to pursue positive net investment over the medium term.

The debt brake allows the federal government to take out new loans up to the value of just 0.35 per cent of gross domestic product, adjusted for the economic cycle – currently about €12 billion. It was introduced in 2009 to prevent public debt from rising in the wake of the global financial crisis and at a time when concerns about the demographic pressures on Germany’s welfare state were growing.

Mr Kastrop said it had “worked well”.

“It has definitely made government and parliament more disciplined when it comes to spending, and helped to put the public finances on a more sustainable footing,” he said.

The rule continues to enjoy broad support among experts. A survey of 120 leading German economists published this week by the Ifo Institute found that 64 were in favour of retaining the debt brake, while 31 wanted it to be abolished.

But Ms Merkel's conservative-led government has gone even further than the debt brake by pursuing a policy of zero new borrowing and balanced budgets - known in Germany as the schwarze Null or black zero.

Helped by a 10-year economic boom, the policy had left Germany with a “great deal of fiscal space”, Mr Kastrop said. “But successive governments just used that to reward their supporters with political giveaways rather than invest in the future - in technology and innovation.”

Indeed, 48 per cent of the economists in the Ifo survey said they opposed the schwarze Null policy, with only 34 per cent supporting it.

Mr Kastrop said he now favoured loosening the debt brake rule by linking it to Germany’s debt-to-GDP ratio. This has been falling in recent years and now stands at below 60 per cent.

This linkage would mean that “if the debt-to-GDP ratio fell below 50 per cent, the 0.35 per cent limit on new borrowing could rise to, say, 0.7 or even 1.0 per cent”, he said. Similarly, if the debt ratio went up again, the previous limit of 0.35 per cent could be reinstated.

But Mr Kastrop acknowledged that Germany’s constitution would have to be amended to change the debt brake rule - a highly complex process that requires two-thirds majorities in both houses of the German parliament. – Copyright The Financial Times Limited 2019