By David Merkel, Courtesy, Handelsblatt
In a surprise move that has stunned Germany’s otherwise impassive markets, Chancellor Angela Merkel’s Christian Democratic Union (CDU) party has called for the creation of a “debt brake” that will force her government to keep German debt on a downward trajectory. This is like putting a stop sign on the green light that many politicians have considered essential for the economy to continue to grow (almost evenly between consumption and investment).
Not surprisingly, the government’s new debt policy will be ruled out by Angela Merkel’s cabinet for fear that the decline in debt on the German balance sheet will slow the country’s economic growth. Merkel clearly does not want to burden her government with ever-growing debt, and her rule will mean that any extra borrowing will not be allowed to exceed the 0.5 percent goal set by the Ministry of Finance.
Of course, a “debt brake” has never before been tried by a government in Germany, and it is a much more significant challenge to the fiscal policy of the Bundestag, as the next election is over a year away.
As a starting point, Germany’s goal must be to ensure that new borrowing is consistent with an overall program of strengthening debt payments. This would have to include a strategy to reduce the country’s enormous burden of privatizations and stimulus spending which have been used in recent years to create more demand. Unfortunately, this strategy is likely to become more politically toxic as investments become seen as politically difficult and as interest rates rise.
Let’s also not forget that not only Germany, but also almost all of Europe is heavily invested in the US economy and in US debt. This means that any policy changes will become highly uncomfortable in the US.
To sum up, the new debt policy is expected to have negative impact on German growth. This means that German business leaders will likely endorse the new policy, since it will make them feel more secure about the stability of Germany’s overall balance sheet. Of course, this makes them feel secure enough to do whatever it takes to attract foreign investment into their businesses.