The Schuldenbremse is often depicted as a bulwark against inflation. Actually, it can contribute to rising prices.
In the domestic debate about Germany’s Schuldenbremse (the constitutionally entrenched ‘debt brake’), its Free Democratic Party—whose leader, Christian Lindner, acts as finance minister—relentlessly chants an old mantra: the rule acts as an inflation brake. Amid the current slump, this makes little sense.
Not only is there dire need for public investment in economic restructuring. Developing renewable energy will buffer future price shocks. At the moment, perversely, Germany’s strict adherence to fiscal barriers even drives up prices. This is dangerous.
Reasons for rules
There are valid reasons for fiscal rules. Unrestrained expansion of public spending can undoubtedly shake the value of money, as numerous historical examples show. Furthermore, to borrow from markets, governments need to gain and maintain their trust. This requires policy-makers to keep an eye on the sustainability of the public finances and a lid on spending, especially in a currency union without national monetary sovereignty.
Beyond economics, there is a conspicuous political element to fiscal discipline. Especially in Germany, a careful weighing of necessary expenditures carries an identity-forming, moral quality, which is deeply embedded culturally . Thus, stability-oriented tenets such as the debt brake, or skewed analogies such as of the thrifty ‘Swabian housewife’, have not lost their popular appeal over the years.
Yet deficit-financed spending does not inevitably fuel inflation, as fiscal hawks like to claim: comparisons with Japan or the United States provide the contrary evidence. It all depends on timing, as well as the vehicles and objects of expenditure.
Recent price increases in Germany have been, as elsewhere in Europe, the result of a supply shortage—not astronomical public spending driving up demand. This should be understood as a price shock, primarily caused by increased costs for energy and raw materials, alongside bottlenecks in global supply chains and, not least, corporate profit hunger.
Higher costs of living by no means stem from a buying frenzy by German citizens or businesses rampantly throwing money around and thereby pushing up prices. Rather, domestic consumption and wage increases remain sluggish while lagging growth recently tempted observers to rebrand Germany with the ‘sick man of Europe’ metaphor.
Golden rule
Yes, if the federal government were to hire a fiscal helicopter, to scatter borrowed money gratuitously across the country, prices would eventually rise. The debate about fundamental reform of the Schuldenbremse does not however aim to incite a short-term spending spree. Rather, proposals such as a ‘golden rule’ to insulate capital expenditure seek to provide space for targeted, long-term investments in infrastructure, climate-neutral restructuring of the economy and expansion of renewable energies.
These would make Germany more resistant to crises, reduce energy demand, expand the supply of domestically produced electricity and—last but not least—react to the looming threat of inflation due to climate change. Hence, not strict fiscal rules but public investment would be the real ‘inflation brake’. To forgo such expenditure for the sake of arithmetic is knowingly to accept vulnerabilities and associated future price shocks.
Indeed, the latest financial reorganisation by the German government to meet the demands of the Schuldenbremse, responding to a ruling by the Constitutional Court in November which bore a hole in its budgetary planning, shows that relentless adherence to debts rules itself can push up prices. When the law mandates strict prioritisation of funds but certain large-scale projects need financing beyond the means at hand, money must be saved elsewhere and/or additionally collected from taxpayers. This, as the budgetary cuts, increased taxes and levies—following the ruling—show, can significantly drive up prices and the cost of living.
Ideological stance
Lindner and the FDP may justify their persistent commitment to the Schuldenbremse and refusal of any fundamental reform as fighting inflation but they provide little persuasive evidence for its purported ‘higher wisdom’ in regard to price stability. Rather, they reveal their ideological stance vis-à-vis the public finances.
Politically, such manoeuvres are more than questionable: inciting the proverbial national phobia around inflation—even invoking the collective memory of hyperinflation—does not only exploit public concern. It is especially harmful when the acclaimed solution, the Schuldenbremse, does not provide any remedy but fuels inflation.
In an opinion poll last year, one in six Germans complained of existential financial distress due to inflation. A recent survey shows that rising costs remain citizens’ biggest worry. This year, the envisaged additional heating, fuel and electricity costs will particularly hit already strapped households. In that context, upholding the debt brake can provide a dangerous stimulus for those political forces that thrive on exploiting fears and frustration.
David Barkhausen is a research associate at the Institute of Political Science (IPW), Heidelberg University. His research focuses on the transformation of political discourse around monetary and fiscal policy and he is working on a dissertation on the German 'stability culture' in the eurozone.