Three years ago, when Germany brandished its €130 billion debt-financed Covid “bazooka”, many wondered what had come over then chancellor Angela Merkel.
After preaching thrift and cuts for the Republic of Ireland during the euro crisis, Germany’s austerity queen started borrowing like it was going out of fashion.
German economist Lars Feld joked to The Irish Times that her euro crisis critics must be wondering now, “what they’re smoking” in Berlin. Three years on, some are asking the same question of Prof Feld himself.
The 57-year-old Freiburg-based economist has made the leap from so-called economic “wise man” government adviser to chief economic adviser to Christian Lindner, Germany’s liberal finance minister, who finds himself without a budget.
Three weeks ago, Germany’s highest court ruled unconstitutional efforts to repurpose some of the €60 billion in remaining “bazooka” pandemic funding, throwing into question the huge climate and infrastructure projects of Berlin’s so-called traffic light coalition.
Dr Lindner has a €17 billion hole to fill in this year’s federal budget and — three weeks on — still no agreement from Berlin’s three government parties on whether the gap will be closed by cuts to spending and subsidies or further borrowing.
Squaring the circle is a political minefield given the three ruling parties’ differing political priorities: Chancellor Olaf Scholz’s Social Democrats (SPD) are defending welfare increases; the Greens’ future depends on salvaging their transformational climate investment projects while Dr Lindner’s Free Democrats (FDP) are finished unless they deliver the promised balanced budgets before election day in September 2025.
The elephant in the corner of this debate is the so-called debt brake, a constitutional limit on fresh borrowing to 0.35 per cent of gross domestic product.
Sitting atop this political fault line is Prof Feld who, as a leading ordoliberal economist, is sceptical of state involvement.
For instance: Intel. Last year Germany beat Ireland and other countries and landed a massive new plant by the US chip manufacturer to be located in the eastern city of Magdeburg. But the €10 billion Intel managed to shake down in federal subsidies was financed by the fund struck down three weeks ago. And anyway, said Prof Feld, it is money Germany needs more urgently to plug the hole in the budget.
“I would neither invest in Intel nor would I pay huge [transformation] payments for subsidies for ageing industries,” said Prof Feld on a recent talk show. “In the end, we will have to ask ourselves: how much money have we dumped in there?”
As for a growing chorus of calls to reform the constitutional debt brake, in particular to allow for future-oriented debt-financed investment in infrastructure? Prof Feld is having none of it.
In his analysis, Germany’s trains and bridges are on their last legs not for lack of money, but because complicated federal-state rules prevent any money ever being spent.
Finally, after the Covid trip of debt-fuelled spending, he said, Germans needs to tighten their collective budgetary belt before repayments of pandemic borrowing begin in 2025 and 2026.
Prof Feld’s thinking has now moved from Berlin to Brussels, taking a critical swipe at the new European Commission budget proposals. Along with other liberal EU countries such as the Netherlands, Prof Feld has criticised the new plan as “going in completely the wrong direction because it would allow heavily indebted member states a higher deficit instead of setting incentives for consolidation”.
The intervention from Berlin came just in advance of an EU finance minister dinner to discuss new fiscal rules for the bloc. In this, Berlin’s Feldian ideas of constricting investment have collided with France, which objects to any rules that ban “investment in the future”.
After years of looser fiscal rules, and debt-fuelled state stimulus, Prof Feld, a committed Taylor Swift fan, would rather Germany — and Europe — would just shake it off.
But his boss, finance minister Dr Lindner, conceded on Thursday that things are not that easy. Berlin and Paris were 90 per cent in agreement on the new rules, but “the 10 per cent where we haven’t yet agreed” — including treatment of deficits — “could be very decisive”. With a late-night dinner looming, it is another case of smoke ‘em if you got ‘em.