Good Debt

Spending to Save

More spending, more building, more growth.
  • Why it matters

    Why it matters

    A growing global lobby advocating increased spending on infrastructure projects to boost growth suggests Germany’s austerity drive may have run its course.

  • Facts


    • Germany plans to balance its budget next year for the first time in 45 years.
    • Berlin has long argued that countries must free themselves from taking on more debt.
    • A former U.S. Treasury secretary and the IMF are calling for global public spending on infrastructure to boost growth.
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Meetings of the world’s economic leaders have become a bit of a gauntlet for Wolfgang Schäuble. For years now, Germany’s finance minister has been viewed as the bad guy because of his continued insistence that reduced spending should be a top priority, even in times of weak growth. New debt has become taboo for Mr. Schäuble.

At the recent International Monetary Fund summit in Washington D.C., the German austerity advocate seemed to cut an even more forlorn figure. With the slump in industrial production in Germany and mounting signs of recession in the euro zone, the magic is gone from Mr. Schäuble’s “growth-friendly savings policies.” Resistance to strict fiscal limits is on the rise in Paris, Rome and Washington. Even Beijing is demanding that Germany do more to stimulate growth.

Last week, Mr. Schäuble had to climb into the political ring with Larry Summers – the ex-U.S. Treasury secretary and one of the sharpest critics of German austerity policies. Mr. Summers asserted recently that, in view of low interest rates, there has never been a better time for borrowing money to get growth going again.

The former Clinton administration cabinet member is calling for a program of public spending on infrastructure, which is vigorously supported by the IMF. According to the growing chorus in Washington and the world, it makes sense if even countries with high national debt use borrowed money to build new highways, broadband networks or schools.

In the long run, Berlin will not be able to resist the pressure to promote growth.

Mr. Summers even speaks of a “free lunch,” meaning that public investment in infrastructure virtually pays for itself, through use fees, increased tax revenues and other growth benefits that far exceed financing costs.

His conclusion may sound absurd to German ears: New debt, properly invested, does not increase government deficits but can actually reduce them. If true, it would completely deflate Mr. Schäuble’s killer argument that you can’t fight the debt crisis with new borrowing.

So is there such a thing as good debt?

Up to now, the German government has steered clear of this heretical issue. For Chancellor Angela Merkel and her finance minister, achieving Germany’s first balanced budget in 45 years has become exclusive proof of the success of their fiscal policy. This sounds more like ideology than economic reasonableness. The half-life of this sort of absolute statement is dramatically reduced when the economic environment changes. And that is exactly what is happening now.

Economic conditions are deteriorating almost everywhere in the world. There is increasing pressure on the German government to do more to promote growth. In the long run, Berlin will not be able to resist this pressure.

Standing alone against the rest of the world? That is not a wise policy for a country that, more than any other, is so connected to and affected by global commerce.

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Mr. Schäuble does not need to renounce his fiscal and political model. But the time has come to find a better balance between savings and growth. Germany should use its financial and political maneuvering room more deliberately to stimulate growth. It is not true that there is nothing to do. There is an obvious need for spending on schools and roads. And expanding the broadband network is already a goal of the government.

It would make economic sense to first free up more money for investments in infrastructure, for example by reorganizing the budget and cutting superfluous subsidies. The next step would be to improve the efficiency of state investment projects. The IMF is engaged in talks about criteria for efficiency.

In countries such as Chile, Australia and Canada, experts are charged with monitoring these sorts of projects. Private investment should also be considered for public projects, something that is already being discussed in Berlin.

At the end of this process, however, the German government will not be able to side-step an important question. Does it make economic sense to take on debt for certain investments in German or European infrastructure?

There are no across-the-board answers here, only concrete responses to individual situations. But it is economically unreasonable and politically dumb to refuse to engage in the conversation.

The image of a free lunch might well be exaggerated. But Mr. Summers is right when he says that beyond debts, there are other heavy burdens we don’t want to bequeath to our children, such as bad schools, crumbling roads and obsolete communication networks.


The authour is Handelsblatt’s international correspondent. To contact the author:

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