Insurance state: ECB has in fact assumed state financing

“A tremendous power of guardianship rises above these citizens, which alone takes on ensuring their comfort and watching over their fate. It is absolute, detailed, punctual, forward-looking and mild. It would be like paternal power if it – like this – had the aim of preparing people for manhood; On the contrary, it seeks to hold people irrevocably fast in childhood; she is happy when the citizens are doing well, provided that they only think about their well-being. She likes to work for her happiness; but she wants to work on it alone and decide on it alone; it ensures their safety, sees and secures their needs, facilitates their amusements, conducts their most important business, directs their commercial enterprises, regulates their successes and divides their inheritance; could it not completely relieve them of the worry of thinking, and the trouble of living? ”This is how Alexis de Tocqueville described the caring, patriarchal state very clairvoyantly in the 1830s.

At the end of the 19th century, Otto von Bismarck then provided the template for the global entry into the insurance state. The Chancellor introduced health insurance in 1883 and accident insurance in 1884. In the period of 1889 and 1891 the statutory pension insurance was added. And a few decades later, the state unemployment insurance was established, first in 1911 in Great Britain, then in 1919 in Italy, 1927 in Germany and 1935 in the USA at the federal level.

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However, state unemployment insurance did not appear to be sufficient to protect citizens against economic crises. The experiences of the Great Depression in the early 1930s therefore prepared the ground for the economic management through state fiscal policy proposed by John Maynard Keynes in 1936.

However, the practical application of Keynesian economic policy in the 1970s, which was marked by the oil crisis, led to “stagflation”, in which high inflation was accompanied by low economic growth. During the 1980s, this experience resulted in the state largely abstaining from economic management.

By the late 1980s, however, the Chairman of the US Federal Reserve, Alan Greenspan, appeared to have found the philosopher’s stone for managing the economy through monetary policy. The central banks became powerful insurers around the world against economic downturns and financial crises.

But even during the Great Financial Crisis of 2007/2008, they needed government aid to rescue the banks. And after they had largely used up their powder in the form of interest rate cuts when the corona pandemic broke out, the state, as a powerful all-insurer, took back command of the economy.

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But the “all-insurance state” – as Ludger Schuknecht, the former chief economist of the Finance Ministry calls it – is reaching its financial limits in times of the pandemic. In contrast to private insurance, the insurance state cannot fall back on financial reserves that were set aside in better times.

He must therefore borrow the accumulated private sector savings. As long as these savings have no other use, he can do so without provoking interest rate hikes.

If, however, his demands exceed the willingness of savers to lend him money at the cheapest possible rate, he runs the risk of driving other customers for savings capital out of the running with higher interest rates. To avoid this, the insurance state has recently switched to having the necessary money printed by its central bank.

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The European Central Bank is legally prohibited from providing monetary public finance. But European law is extremely flexible. As a result, even the ECB, like other central banks, has actually taken over the state financing – which it denies, of course.

This becomes clear if one follows the development of the bond purchase programs. If one extrapolates the purchases of public bonds in the first eleven months for the entire year, the ECB is likely to have bought just under one trillion euros or around nine percent of gross domestic product (GDP) in these papers this year.

The International Monetary Fund (IMF) estimates the total budget deficit of the euro countries at around ten percent of GDP, so that around 90 percent can be financed by the ECB through the creation of new money.

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If the ECB continues as before, which is possible according to the latest resolutions, it could buy around 1.4 trillion euros in government bonds next year. That would be more than enough to finance the budget deficit of EUR 575 billion forecast by the IMF for 2021 and the planned EUR 750 billion in debt for the EU reconstruction fund.

The insurance state, taken to extremes, can create money for everyone and everyone. However, it is doubtful whether citizens will be able to buy something with it.

Thomas Mayer is founding director of the Flossbach von Storch Research Institute and professor at the University of Witten / Herdecke.

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