This Thursday, the Bundestag launched a supplementary budget for 2021 to raise new federal budget debts to the record value of 240 billion euros for this year. With this “courageous step”, according to Federal Finance Minister Olaf Scholz, the economic consequences of the pandemic are to be cushioned. Germany’s total debt rises to 2200 billion euros, also an all-time high. The debt ratio, i.e. the amount of debt in relation to economic output, will be around 80 percent in 2021. Germany is by no means alone in this debt orgy. All EU countries are doing everything they can because of the pandemic. The debt is piling up from Finland to Greece. The European statistics agency Eurostat announced that the debt ratio of the countries in the euro area will be on average at almost 100 percent this year. Ascending trend.
Stability Pact remains suspended
Wait a moment! There was the Stability and Growth Pact of the euro zone, which stipulates a debt ratio of a maximum of 60 percent for members, with a new debt of three percent. The EU suspended this stability pact because of the severe recession – until at least the end of the year, said EU currency commissioner Paolo Gentiloni. And it will probably stay that way in the coming year, too, say Gentiloni’s employees. The crisis continues to be fought with enormous debts. How long can this go well?
As long as necessary. That is what the head of the economic policy think tank “Bruegel”, Guntram Wolff, thinks in Brussels. “I think it will definitely continue like this for the time being. As I assess the situation, the rules will also be suspended next year. That makes sense as long as we are still in an exceptional economic situation.” In contrast to the financial crisis ten years ago, the debts are less problematic this time, Guntram Wolff said in an interview with DW. Unlike back then, interest rates on government bonds are very low. The cost of debt is therefore low for the state coffers. Guntram Wolff does not see the danger that interest rates will rise as long as central banks such as the European Central Bank stick to their expansionary policy, that is, print money and flood the market with it.
Financial expert Wolff: The key is growth
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Grow out of debt
The Brussels expert does not currently see a problem for the stability of the euro. And who will pay back the debt in the end? The answer is simple, says Guntram Wolff. “The decisive factor with high debts is always the growth rate. If you achieve higher growth, then the debt problem will actually resolve itself. Austerity policy is of only limited help with high debts.” So saving is of little use. One should grow out of debt.
Markus Ferber also thinks this recipe for reducing debt after Corona is correct. The CSU member of the European Parliament has been a financial policy expert for the Christian Democratic parliamentary group for many years and already accompanied the financial crisis ten years ago. “At the moment we are not worried about the stability of the euro. Politics in many economic areas are similar and so there are no upheavals.”
MEP Ferber: Suspended stability pact must not become a permanent state
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However, says Markus Ferber to DW, one has to return to the stability path at some point. He advocates applying the Stability Pact again as early as next year. Otherwise, there is a risk that some euro countries will want to make the exception permanent in order to finance their households comfortably without major reform efforts. “I am really worried about that,” said the MEP. The joint borrowing of 750 billion euros decided by the EU to finance the Corona development fund must also remain a one-time action, demands Markus Ferber. “Anyone who thinks they can reorganize their budget nationally because they are moving the mountains of debt to Europe will fail. Because they too must be paid off again by the member states.”
Who pays in the end?
The debts, which the EU wants to collectively collect for the first time this year, would ultimately have to be paid back by the citizens of the EU – by future generations, according to “Bruegel” financial expert Guntram Wolff. That is why, tease some EU diplomats in Brussels, the reconstruction fund is also called “Next Generation EU”.
Greece is heading for a debt ratio of 200 percent. Italy to 180 percent. If that had happened before the Corona crisis, all alarm bells would ring. But now both Guntram Wolff and the MP Ferber remain rather calm in the case of Greece. The country has been sufficiently rehabilitated over the past ten years. Financial expert Wolff believes that the very high debts do not pose a threat to the euro zone. “We currently have a much more robust monetary union. We have a stability mechanism in the euro zone, we have the new EU reconstruction fund, we also have a monetary policy that has learned its lesson.”
ECB boss Lagarde: Don’t stifle aid too early, keep borrowing money
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Problem child Greece – or is it more Italy?
“Of the 27 EU countries, Greece is the only one that is tying its post-Corona reconstruction plan to a reform agenda. I am less worried about Greece than about other countries. My biggest concern is, to put it bluntly, Italy” says MEP Markus Ferber. In the event of rising interest rates or a wave of bankruptcies, the Italian state and the banks could quickly get into trouble again. Mario Draghi, the new Prime Minister of Italy and former head of the European Central Bank, is betting on a clear growth policy. Growing to get out of debt. Guntram Wolff believes that this could succeed: “If Italy has just a little more growth, then a financial crisis is very, very unlikely.” Speculation in the financial markets could be avoided given the currently extremely low financing costs for debt.
And if not? That is very unlikely, the expert continues. All major countries in the world, especially the USA, are currently in debt. The US debt ratio is set to skyrocket to 133 percent in 2021. The central banks provide cheap money. The interest rates are low. So is inflation. The President of the European Central Bank, Christine Lagarde, together with her colleagues from all over the world, encourages them to stick to this course for the time being. “Ending the measures too early would be wrong and would lead to jumping over a cliff,” Lagarde repeatedly told the EU finance ministers. So: keep going into debt. After the pandemic one can see further.
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