Harsh austerity ‘imposed on Ireland’ by Berlin, says ex-official

Ireland was hit with unnecessarily harsh austerity measures a decade ago at Berlin's behest, a former German finance ministry official has conceded.

Minister for Finance Paschal Donohoe is in the German capital today and will meet federal finance minister Olaf Scholz and his predecessor, Wolfgang Schäuble.

But Prof Christian Kastrop, a former Schäuble aide, suggests Ireland was caught in the euro crisis crossfire between Germany and southern European bailout countries.

"We needed different antibiotics for different programme countries but there was a tendency to see [them] as a group," said Prof Kastrop, an economist and now head of the European programme at the Bertelsmann Foundation.

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He says the dominant view in Berlin at the time – particularly in the Merkel chancellery and cabinet table – was to ensure all countries swallowed strong austerity medicine.

But this rigidity did not reflect differentiated thinking then towards programme countries, according to the economist, in particular optimism towards Ireland once it mastered its banking sector problems.

“I never understood back then why programme countries making progress were hit with overblown austerity measures rather than more restraint,” said the former finance ministry official. “To be fair, when it comes to other countries, and I don’t mean Ireland, it was right to hold them to certain fiscal discipline.”

‘German hubris’

Even as the crisis deepened, he said German politicians felt their southern European counterparts were doing everything to solve problems at macroeconomic level and avoid measures that would hurt them politically. Indirectly, he said, Ireland was hit with “German hubris”.

“I don’t want to play down a sometimes negative role of the Germans,” he said. “They could have been more generous towards Ireland in many cases without overdoing things.”

Prof Kastrop worked in the federal finance ministry for nearly 30 years, including as head of general public finance and the fiscal policy division. Between 2008 and 2010, he was president of the Economic Policy Committee of the Council of European Finance and Economic Ministers and the Eurogroup in Brussels.

He attributes Berlin’s austerity-heavy crisis approach to psychology, in particular historical trauma regarding debt and inflation. This experience coloured West Germany’s dominant post-war economic thinking that continues to dominate political circles.

While some countries believe in a more pragmatic approach to public finances – pumping public money into a cooling economy as private investment retreats – Germany believes in pruning back slowing economies first, to maximise the effect of any public money invested subsequently as stimulus.

This dominant economic ideology, and a general suspicion of debt, fed into several so-called fiscal brakes, co-devised by Prof Kastrop: since 2016 for the federal budget, from next year for Germany’s 16 federal states – as well as, in a different form, at EU level.

The fiscal rule prevents German finance ministers borrowing more than 0.35 per cent of economic output: at federal level since 2016, from next year in states.

Balanced budgets

Now Prof Kastrop fears the rules he helped devise – to block runaway borrowing by politicians – have been distorted. In particular he accuses Germany's ruling Christian Democratic Union of fetishising balanced budgets – the so-called "black zero".

This has demonised debt-financed spending and, he says, contributed to years of chronic underspending even on future projects – education and physical and digital infrastructure.

“You make a great mistake if you cling to rules when the circumstances change substantially,” said Prof Kastrop.

If German politicians continue to ignore the debt and spending flexibility allowed in national and EU debt brakes, Prof Kastrop fears the fiscal rules he helped devise may “mutate into a monster” and contribute to the kind of economic instability the rules were designed to prevent.

“One size,” he said, “never fits all”.