The German government has turned the relation between debt and growth upside down: With the reform, the entire economy will work to pay the debt.
The German government has turned the relation between debt and growth upside down: With the reform, the entire economy will work to pay the debt.
By Yunus Soner, Berlin / Germany
Germany’s militarization of foreign policy is advancing fast. The country has recently decided to deploy troops to Lithuania permanently. Simultaneously, the government has deepened the initiative of “Change of Era”, which former Chancellor Olaf Scholz had announced, establishing a fond of 100 billion Euro for the military.
In its last days before the new elected parliament constitutes, the current majority of Social democrats, conservatives and Greens has decided upon a new debt and investment package, with huge consequences for militarization specifically and economy and fiscal policy generally. We spoke about the package with Stephan Kaufmann, expert on economic and fiscal policy.
A huge special fund has been approved. What exactly was approved? What was permitted?
At the time of the debt brake, government debt of 0.35% of economic output was permitted. This has now been modified. Firstly, a special fund of €500 billion has been established. This will be used for infrastructure spending.
In addition, the federal states have been permitted to take on further debt. It is estimated that over the next 10 years, this will amount to approximately €200 billion in new debt.
And finally, third and most importantly, military spending above 1% of economic output has been permitted to not count towards the debt brake. This means that, in principle, borrowing for armaments is immediately possible. And this is expected to amount to approximately €1,100 billion over the next 12 years.
All in all, over the next 12 years, 1.7 trillion in new debt has been approved. 1.7 trillion! That’s not all that was approved; it’s actually even more. But that’s what we can expect now.
And the content of this debt is, on the one hand, infrastructure and, on the other hand, military.
Right. The big chunk. As I said, they’re expecting 1,100 to 1,200 billion euros over the next 10 to 12 years. That’s the big chunk, that’s military spending. But it could also be much more. In principle, the government has freed herself from restrictions on borrowing for armaments. She can now borrow as much as she wants.
Instead of debt for growth, now growth for debt
What does this mean for economic policy?
This is quite a change in conventional economic and financial policy. It’s a complete reversal, considering that in the past, shortly after the euro crisis, it was said that debt is bad, that debt harms economic growth, and therefore we must not take on any more debt.
That’s why the debt brake was introduced. The objection was, ‘yes, we can take on debt, we even have to take on debt, namely for investments to drive economic growth’.
Today, we’re being told we have to take on debt, especially for military equipment. That doesn’t help growth much at all. And that’s precisely why we need so much economic growth now and must strengthen our competitiveness.
It used to be said that we had to take on debt for growth; today it is said that we absolutely need growth because we will be taking on so much debt.
Is this a new dominance of financial capital?
It’s a two-sided issue. On the one hand, a country’s creditworthiness naturally depends on the assessment of the financial markets—that is, whether Germany or another country can even take on that much debt and at what interest rate. That’s entirely up to the decision of financial capital, because they determine whether they will lend money to this country and at what interest rate. In this respect, the state is already making itself heavily and even more dependent on financial capital.
On the other hand, the state also uses financial capital. Because without access to financial capital, it can’t access the resources at all. It’s absolutely clear: the money for the current rearmament effort can never come from the state budget. It must come from the financial markets.
And how are they reacting to this new debt policy?
On the first day of the announcement, interest rates rose. This means that the risk premium for German bonds, for German Schuldscheine, rose. And one could interpret this as meaning that the financial markets are uncertain about whether the plan is sound. But one could also interpret it as meaning that the financial markets expect to generate trillions of euros in new economic growth, which justifies higher interest rates.
And what does that mean for spending policy? Well, it’s likely that this will involve a significant amount of austerity.
Yes, that’s quite interesting. It’s been said that the times—on the one hand, one could say that the times of austerity, of spending cuts, are actually over, because the government is going all out. 500 billion for infrastructure, 1,000 billion for armaments, 200 billion from the states, perhaps also for infrastructure or education spending for the states—we don’t really know. On the one hand, from that perspective, the times of austerity are over.
On the other hand, growth must also pick up now to justify the high levels of debt. For the state or the government, this means not necessarily cutting spending but reorganizing it. The likely next Chancellor, Friedrich Merz, has said he will devote every minute of his term in office to one goal: strengthening Germany’s competitiveness. This also applies to the federal budget, where all spending will be reorganized based on which expenditures are beneficial to economic growth and which government spending is more likely to be detrimental to it.
Pressure on society
That is of course the big question, what about social spending in particular?
Social spending is currently considered a part of the wage bill, and high social security contributions therefore tend to mean higher wages, and higher wages, it is said, are detrimental to international competitiveness. Therefore, it is currently assumed that the next government will address social spending. And that’s where we’re cutting.
We can expect increasing pressure to be exerted on both wage earners and other social benefit recipients, such as the unemployed, recipients of social security benefits, etc. I don’t know for sure if it will happen soon, but it’s foreseeable that pressure will be exerted, particularly on pension funds, for example. It’s foreseeable that more pressure will be exerted on the unemployed. There are plans to toughen sanctions for unemployed people who turn down reasonable jobs. It’s foreseeable that a major complaint among German companies is that health insurance and the healthcare system are too expensive.
Nothing is planned yet, but the complaints are very loud. In this respect, I would suspect that pressure is being exerted on wage earners via the social side. On the other hand, this is somewhat different from the early 2000s, when Germany already implemented major social reforms, Agenda 2010. Severe social cuts were implemented then. Back then, however, unemployment was very high. We had 5 million unemployed. Today, unemployment is extremely low, and there is more of a threat of a labor shortage. In times like these, I believe it is harder to implement policies that target workers.
Is this the beginning of a so-called war economy or is it a warring economy in fierce competition?
One would have to define what a war economy is. I would define a war economy as one in which ever-increasing shares of the nation’s economic potential, of its economic strength, are reserved exclusively for the production of weapons and for the war economy. That’s precisely not what Germany is doing. Germany isn’t taking the funds or resources for its military from its current economy; instead, it’s approving debt and building it up on top of it. It’s not reducing the civilian economy in favor of the military sector; it’s simply building up the military sector.
I think that’s the difference from a war economy, where the state really has to take something away from the civilian sector to build up the military. Rather, it’s what you could call a war economy. An economy that’s gradually being prepared for war. That’s one thing.
For example, you can pack in everything that’s going on: goods, securing raw material chains, securing supply chains, investment protection, meaning that investments from foreign companies are examined to see whether they pose a threat to national security. This will, on the one hand, make the economy more or less capable of war, eliminate strategic dependencies, and, on the other hand, mobilize the economy so that it provides the resources to enable rearmament. That’s the ultimate goal. In that sense, a warlike economy.
Europe and the US
How do you view the European-American relationship in the wake of these sanctions or tariff wars?
Yes, the US government—I wouldn’t necessarily say Donald Trump, I don’t want to personalize that. The US government is dissatisfied with the global market revenues accruing in the US, and they’re saying that quite clearly. They’re saying more needs to be channeled to the US. They’re now imposing tariffs and trying to attract global companies from all over the world to the US. Including their own.
They want to bring their own companies home, and above all, they want the world’s capital to go to the US and produce there. There, it doesn’t have to pay tariffs. And from there, it can also export. The Europeans are understandably very dissatisfied with this. The interesting thing is that they’re not doing anything. They’re imposing a few counter-tariffs, but that won’t achieve much.
And above all, they are complying with the wishes of the US government, especially with regard to their rearmament. Rearmament is something that Donald Trump has always demanded of the Europeans. And that’s what they’re doing now. Interestingly, this is being done under the banner of “we’re making ourselves independent of America.” At the same time, it’s always being said that if we rearm now, we’ll become a more important strategic partner of the US. This is how the Europeans express their dilemma: they can only be a world power as a sharer in US world power, but not an autonomous world power. The Europeans are not in a position to be a world power in their own right, because that would mean they would be a world power in competition with the US. Not just without the US, but in competition with the US.
And the Europeans are incapable of doing that. If the Europeans want to achieve something or remain a global power, especially against the backdrop of China’s rise, then they can only do so alongside the United States. And that’s why there’s a lot of criticism of Trump, but essentially, they’re giving in to him.