ZERO SUM

When Borrowing Nothing Costs Too Much

schäuble-blue-DPA-CHANGED
Call me Mr. Thrifty.
  • Why it matters

    Why it matters

    The German government is totally focused on reducing debt, but it is stopping much needed investments in public infrastructure.

  • Facts

    Facts

    • Germany’s gross domestic product (GDP) expanded by just 0.4 percent in 2013.
    • Strong consumer spending driven by record employment kept the country out of recession.
    • The government is working on models where private investors would take over financing of projects that up to now have been public.
  • Audio

    Audio

  • Pdf

Wolfgang Schäuble has come closer to his grand goal of a balanced budget than any German finance minister in the last four decades. So it was no surprise when he submitted his budget this week and called for staying the course on fiscal discipline. It’s a sign of personal ambition, but above all deep conviction on his part.

Mr. Schäuble, a member of Chancellor Angela Merkel’s conservative Christian Democratic Union (CDU), draws one big lesson from the euro crisis:  Solid finances should be government’s top priority. And this is not wrong. Especially since Mr. Schäuble has accomplished something many in Europe still consider impossible: He has cut Germany’s budget deficit and yet Europe’s largest economy has still grown.

There is no doubt that Mr. Schäuble has performed a great service by eliminating excessive, debt-inducing spending. In good economic times, the state should be able to do without a deficit. So in this respect, one might even say that Mr. Schäuble has had too little ambition and not cut enough in recent years.

Germany’s budget balance from 2009 to 2013

german budgetary

But the era of ever-declining interest payments and rising tax revenues could end in Germany. Above all, international conflicts such as the crisis in Ukraine threaten to have a negative impact on the German economy. Does this endanger Mr. Schäuble’s goal of a budget with absolutely no new debt? Up to now, the answer from the finance minister has been no. Now more than ever, Germany must rebalance its books. No new debt.

But that would be unhealthy ambition. As important as it is to close this era of constantly rising debt, it would be wrong to ignore a changing economic environment. Balancing the budget cannot become an end in itself. For Ms. Merkel’s conservatives, enforcing budget discipline while renouncing tax increases has been accomplished only with great difficulty. It is the only palpable achievement of her so-called Grand Coalition so far, and it’s politically understandable that they want to protect the strategy. But it should not lead to economically questionable decisions.

Putting the brakes on debt cannot be the sole justification for private investment models.

This is especially true in the debate over investing in future needs – new roads, schools, bridges and other infrastructure. The government is working on models where private investors would take over financing for projects that up to now have been public.

In theory, this makes sense if it leads to greater efficiency. But now, in times of historically low refinancing costs for government, the requirements should be set especially high here. It will scarcely be possible for private investors to achieve financing on terms as favorable as the government currently can. The users would only end up paying the difference, for instance motorists being charged for improvements to the nation’s roads.

Putting the brakes on debt cannot be the sole justification for these private investment models. It would be more appropriate to shift spending in the budget from consumption to investing in Germany’s future. The purpose of reducing debts should not be to postpone sensible investments or to force them upon others.

This article was translated by George Frederick Takis. Greg Ring also contributed. To contact the author: hildebrand@handelsblatt.com 

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