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Countries Must Maintain Budgetary Discipline

Budgetary Discipline
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EDITOR NOTE: The author below likens the public debt resulting from Covid stimulus to another kind of pandemic--a debt pandemic. The author focuses on Germany, a nation that currently holds a public debt to GDP ratio of 60%. The nation wonders if such debt is sustainable. In contrast, the US total debt to GDP is at 145%--more than double Germany’s burden--yet Americans don’t seem too worried about it. Perhaps a “pandemic” is not the best analogy or metaphor. It’s more like a combination of early necrosis--where you don’t quite feel your flesh rotting away--and the ensuing infection that may result in total system failure when the organs begin to collapse like dominos. Only when Americans’ economic day-to-day experiences begin surfacing painful signs of monetary decay will most take notice and maybe maintain budgetary discipline. Perhaps this is true for other nations across the globe as well. But by that time, it’s often too late. And this is why smart money tends to hedge early and hedge often. 

The prospect of recovery from the COVID-19 crisis makes it all the more urgent to have a firm vision of how the burden of public debt can be reduced once the coronavirus has been vanquished. For this reason, every country must work on itself and strive to maintain budgetary discipline.

October 12, 2020, will go down in German financial history. For the first time, new public debt increased at a rate of more than €10,000 ($11,900) per second, faster than during the 2007-09 global financial crisis, when a huge volume of net borrowing was needed. This headlong acceleration of debt, in Germany and in countries around the world, is the price being paid to stave off the economic consequences of COVID-19.

In the German Bundestag, the fiscal consequences of the pandemic have become a central concern, with Germany’s massive €1.3 trillion rescue/stimulus package fueling an already long-standing debate about the country’s debt sustainability. The key question is whether, and for how long, government and society can continue to shoulder the growing burden.

Detailed assessments offer reason to hope that Germany is well prepared. We have followed the path of sustainability, adhering to the rules of the Stability and Growth Pact of the Maastricht Treaty and reducing our debt to less than 60% of GDP before the COVID-19 pandemic hit. These consolidation measures over the past 12 years have given Germany some financial leeway that can now be used in the crisis. The Harvard University economist Kenneth Rogoff, a former chief economist of the International Monetary Fund, has long argued that Germany’s strong balance sheet gives it the capacity to react forcefully in a deep crisis.

Read More at Project Syndicate

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