Since John Maynard Keynes, substantially increasing public debt in economic crises in order to channel it into investment and achieve full employment has been considered a sensible economic approach. The increased tax revenue from the resulting economic upswing can be used to reduce debt, thus ensuring a balance in the national budget. Over the last 20 years, recessions (Internet bubble in 2000/01, financial crisis in 2008/09, Covid 2020) have consolidated the trends of falling interest rates and the increasing willingness of governments to take on debt that began in the early 1990s.

The fiscal fiscal measures with a budgetary impact triggered by the Covid crisis amount to more than USD 5 trillion worldwide, with additional state guarantees amounting to USD 3.7 trillion. The International Monetary Fund (IMF) expects government debt in the US to increase from 109% of gross domestic product (GDP) at the end of 2019 to 141% by the end of 2020, compared to 105% for the eurozone, up from 84%, with wide variations within the monetary union, ranging from 166% in Italy to 77% in Germany. The debt ratio will continue to rise simply because of the ageing population and the loss of competitiveness in the EU.

There are four ways in which countries can reduce debt:

  • A sustained strong economic recovery will lead to an increase in tax revenues and employment as well as a reduction in social expenditure and the budget deficit. However, in the years before the Covid crisis, economic growth was already so low that only the momentum of the expansion of public debt has slowed down, but the debt has not been reduced.
  • Tax increases and expenditure cuts, which could only be implemented if all parts of the population were to bear the burden. However, without visible successes, which can only be achieved by improving competitiveness, a radical austerity course cannot be sustained.
  • A strong debt reduction, accompanied by a significant loss of confidence in the capital markets, can at least provide a temporary remedy. However, in the absence of accompanying structural reforms, the next national bankruptcy is already foreseeable.
  • Central banks are buying more and more of the national debt, despite their formal independence from politics. This is encouraged by historically low interest rates.

This fourth path has been followed since 1995 in Japan, which is now indebted to 240% of its GDP. When Shinzo Abe became prime minister at the end of 2012, his economic programme consisted, unsurprisingly, of three core demands: continuation of loose monetary policy, debt-financed economic stimulus packages and structural reforms for a competitive economy. The record of his era, which will end in September due to illness, is sobering. The Japanese economy grew by an average of 1% between 2013 and 2019. Excluding the financial crisis, growth was lower than in the years before his term of office. Although the Nikkei 225 share index has doubled since Abes took office, there has been no sustained real economic recovery. Only the interest burden for the state and companies is historically low and could fall even further, because the Bank of Japan, as the 70% owner of the national debt, controls interest rates even at the long end. The result was an increase in the number of so-called zombie companies, which would not have survived without the measures initiated by the state, and prevented a competitive shakeout. Central banks are now concerned about deflation, as the inflation targets of around 2% were not achieved even before the Covid crisis, despite the greatest efforts in monetary and fiscal policy.

Although the euro zone has a common monetary policy with the ECB, it does not have a common budgetary policy, despite the reconstruction fund decided in July. A softening of the Maastricht criteria still existing on paper (budget deficit below 3% of GDP, national debt below 60% of GDP, inflation at most 1.5% above that of the 3 member states with the best price stability) remains inevitable for the EU heads of state and government. The ECB’s inflation target of 1.9% will also have to be exceeded to make up for years of shortfalls. Full employment in recent years has been accompanied by incompatible low inflationary expectations.
The answer must therefore be a common budgetary policy, led by the ECB. For example, if the ECB set targets for nominal GDP, it could pursue both inflation and growth objectives in the face of supply shocks that fuel prices and dampen output. In unitary economies such as the US and the UK, monetary and fiscal policy co-ordination to achieve an agreed target – such as a certain level of GDP growth – is easier to achieve. A newly created independent EU budgetary authority could coordinate EU fiscal policy with the ECB. At regular meetings, the two institutions would define targets on deficits, interest rates and inflation rates and examine their consistency with the national policies of EU members. In the current situation, where fiscal policy is more effective than monetary policy because of very low interest rates that are not conducive to real economic growth, the ECB could even gain credibility despite its massive purchases of public debt.

If a sustainable EU budget reform does not succeed, old patterns of thinking such as a North and a South euro and parallel currencies in the economically less competitive EU member states will remain. It is often forgotten that the countries concerned will receive lower tax revenues in euros after such a separation and will probably no longer be able to service their euro-denominated debts. This would probably be more expensive for the net payers / Northern Euro states / creditors than the common budgetary policy. In the longer term, there is no alternative to centralised management of EU finances involving the individual member states.