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The writer is the president of the Bundestag and a former German finance minister
“In the long run we are all dead,” John Maynard Keynes wrote 98 years ago. He believed that short-term economic intervention was necessary in times of crisis to stabilize the economy. New stimulus programs, among others EU post-pandemic recovery fund, are in line with this tradition. I was on the sidelines from the start, much to the surprise of some people.
At the time I was German Finance Minister reputation for frugality as a principle. Then, as now, my goal was sustainability: borrowing in times of crisis to stabilize the economy makes sense, as long as the issue of amortization is not forgotten. The need to repay the debt later is often overlooked. Many governments focus on the “easy” part of Keynesianism – borrowing – and then delaying the repayment of debts. This constantly expands sovereign debt. Sooner or later, inflation appears. Keynes saw that as a major threat, citing its ability to “overthrow the foundations of an existing society”.
Monetary values are under pressure in many regions of the world, including the EU. Here, more than anywhere else, is a debt-financed fiscal policy he has money measures on his side. The supply of currency in the eurozone has increased massively, without adapting to the increasing volume of goods and services. This boosts inflation expectations in companies and private homes. In this way, the eurozone risks a currency devaluation that could take on an almost unstoppable dynamic.
Already the consumer price index exceeds The European Central Bank’s benchmark is “below 2 percent but close.” Central banks are not the only ones concerned. Keynesian economics experts like Larry Summers or Olivier Blanchard have lamented the crossing of red lines on public debt and noted that there is a greater chance of inflation leaks. The risk of real estate, stocks and works of art is already serious. The asset price index rose by 6.3% last year. In fact, quarterly growth rates even reached double digits. It is well known that a significant part of the overpayment generated by the ECB is investing in capital or commodity markets and fueling speculative bubbles.
This is not a purely economic problem. It also poses risks to the social fabric. Most lenders to states are wealthy individuals and entities. Public indebtedness increases wealth by widening the gap between rich and poor. Keynes once warned that the winners would become objects of hatred. Now, the gap between “those who have” and “those who don’t” poses a tremendous threat to social cohesion.
That’s why we need to come back currency and tax normalcy. The burden of public debt must be reduced. Otherwise, there is a risk of a “debt pandemic” after the Covid-19 pandemic, which would have serious economic consequences for Europe. As the population ages, EU countries will strive to align with the US and China if they are to enable productivity and competitiveness excess debt to jeopardize their financial flexibility. Thus, all members of the eurozone must make efforts to return to stricter budgetary disciplines.
Experience shows that balanced budgets in heavily indebted countries can hardly be achieved without external pressure. On its own, it is likely that members of a confederation of states will be tempted to incur debts at the expense of the community. I have often discussed this “moral hazard” with Mario Draghi. We have always agreed that, given the structure of the European monetary union, competitiveness and sustainable financial policies are the responsibility of the Member States.
I am sure that as Italian Prime Minister he intends to defend this principle. It is important For Italy and the whole of the EU. Otherwise, we will need a European body with the powers to ensure compliance with the mutually agreed rules. This would require amendments to the treaties. However, even without making these amendments, the European Commission is becoming more important in this area.
The hope that Brussels will take would be a eurozone debt repayment pact, similar to the sinking funds invented by Robert Walpol and Alexander Hamilton. As Secretary of the Treasury, Hamilton in 1792 forced the new U.S. states to deposit good guarantees, practice budgetary discipline, and reduce debt. That was the core of the often-mentioned “Hamilton moment”, not the mutualization of debts sometimes recommended to the EU.
The debt repayment plan worked and may work again today. The IMF offers a mixed strategy of “carrots and sticks” as it continues – another legacy of Keynes. I am sure that Europe will be wise enough to follow the British economist in this aspect of his doctrine.
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