THE GERMAN plan to save the euro is lifted from the playbook of Vladimir Ilyich Lenin: trust is good, control is better.
Germany has spelled out its price for supporting Ireland and other distressed euro zone members: sustainable fiscal and economic reforms that guarantee the euro’s long-term stability.
Put simply, Berlin wants to prevent history repeating itself by agreeing new euro zone rules that limit debt-fuelled spending.
At the heart of Berlin’s national recipe for euro zone stability is a “debt brake”, a provision inserted into the German constitution in 2009 that forbids politicians from borrowing beyond 0.35 per cent of gross domestic product (GDP).
The origin of the debt brake was discussion over how Germany would face future challenges, such as the demographic fact that fewer taxpayers are supporting a growing number of pensioners. Debt-driven budgets are not sustainable in a greying society.
Then the global economic crisis erupted, thrusting the debt brake proposal into the headlines, giving it a whole new topicality and relevance.
The aim of the debt brake is to force a paradigm shift in political thinking towards balanced budgets and away from the European debt binge that began in the 1970s. By 2008, Germany’s debt quota had reached 60 per cent of its gross domestic product; debt interest payments consumed 15 per cent of the annual federal budget.
Despite these figures, German officials involved in the legislation admit it was a difficult task to convince politicians to commit themselves to a plan that would strip them of the powers to produce giveaway budgets.
In the end, German officials won over their political masters with a balance between strategic arguments and luck. Berlin’s government at the time was a grand coalition uniting the two main political parties, Chancellor Angela Merkel’s Christian Democrats (CDU) and the Social Democratic Party (SPD).
For the centre-right CDU, with its tradition of fiscal conservatism, the debt brake was an attractive way of reigning in SPD tendencies to spend on public projects, ensuring long-term debt-reduction. For the centre-left Social Democrats (SPD), the brake prevented the CDU from giving its voters tax breaks with borrowed money.
The debt brake, with a 0.35 per cent of GDP debt ceiling from 2016, was inserted into the constitution with the necessary two-thirds parliamentary majority reached thanks to grand coalition backing.
Although they were not consulted, German voters welcome the brake as an insurance policy against spend-thrift politicians.
“Without such a debt brake, the budgetary process can easily get out of control because political decision-makers are not always able to resist demands placed on them and state spending departs from what voters would in general support,” said Prof Lars P Feld, University of Freiburg economist. “Of course it’s a measure that is difficult to introduce when you don’t have a broad coalition in power.”
Berlin’s debt brake is not a complete barrier to fresh borrowing. New debt is permissible in moderate symmetric cycles as well as in emergency situations, although any new borrowing is only permissible when accompanied by a repayment plan.
German officials are optimistic that, with a mixture of financial pressure and political persuasion, Ireland and other euro zone states will introduce their own debt brakes. A constitutional anchor is desirable, they say, although not essential. The end and not the means is key.
Prof Feld, one of the “economic wise men” advisers to Dr Merkel, has conducted research indicating that national fiscal rules have a positive effect on refinance conditions. “Interest rate spreads go down,” he said, “making refinancing a better value proposition for countries.”