With the corona pandemic, the last dams to limit government spending have apparently also broken: In 2020, the EU decided to borrow more than 750 billion euros. In addition, the regulation of the stability pact that the debt of a euro country may not exceed 60 percent of the gross domestic product (GDP) was suspended. It should prevent a state from going bankrupt due to over-indebtedness and having to be rescued by the others.
After the suspension, a real government spending orgy was celebrated. In 2021, debt in France reached 116 percent of GDP, Spain 120 percent, Portugal 131 percent, Italy 155 percent, Greece 207 percent.
So far, thanks to solid state finances, Germany has been seen as an anchor of stability for the entire euro zone: In the event that another euro state starts to falter, the lenders trust that Germany will step in and thus prevent its bankruptcy. But the federal government is now going all out: in 2020 and 2021 it took on new debt of 275 billion euros. The national debt soared from 60 to 70 percent. And it goes on: the Bundeswehr is to receive 100 billion euros. A double-digit billion amount is intended to cushion the sharp rise in energy prices. Even higher amounts are expected for climate protection. New programs worth billions are announced almost every week.
Admittedly, these are turbulent times. But the German national budget is not unlimitedly resilient either. The higher Germany gets into debt, the more its creditworthiness suffers. This affects the creditworthiness of the entire euro zone. Because if the lenders fear that Germany could be overwhelmed as a potential savior, the risk premiums and thus the costs for new loans for southern European countries will increase.
Would that be bad? Not necessarily. The more expensive new loans become, the narrower the scope for additional debt, including in southern Europe. The attempt to ensure spending discipline through the stability pact – i.e. politically – has failed miserably. It is time for market forces to take over.
It sounds paradoxical: the higher Germany’s debt, the more other countries will be reined in via the credit market. Almost sarcastically one would like to exclaim: Dear Federal Government, keep it up! Got big debts!
