By LookChin AI @ Adobe Stock
At the Cato Institute, Romina Boccia discusses the success of Germany’s debt brake and how that might be applied to save the United States from its overindebtedness. She writes:
Germany’s constitutional debt brake, or Schuldenbremse, is a critical fiscal policy tool designed to limit structural government deficits. Instituted in 2009 following the global financial crisis, the debt brake has returned German public debt to sustainable levels while providing a fiscal anchor for the country’s economy. In contrast, the United States lacks such a fiscal brake, and the consequences of unrestrained spending are stark.
This week I’ll be on a panel at the Prometheus Institute Open Summit in Berlin, debating the German debt brake, fiscal policy, and MMT (officially, modern monetary theory, but referring to this pseudoscience as a magic money tale is more apt). I’ll be sharing insights from the US experience relevant to the German context. As Germany debates changes to its fiscal rules following a temporary loosening during the pandemic, there are critical lessons to be drawn from the US experience with unchecked deficit spending.
The German Debt Brake: A Resounding Success
The debt brake has helped place Germany on a more sustainable fiscal footing. Under Angela Merkel, the long-serving Christian Democrat chancellor who was often endearingly referred to as “Mutti” (Mother), the country consistently ran balanced budgets for six years in a row—commonly referred to as the schwarze Null (black zero). By 2019, Germany’s debt-to-GDP ratio had dropped to a manageable 60 percent, a significant improvement from the heights reached during the global financial crisis. This achievement wasn’t just a fiscal success; it marked the culmination of 10 consecutive years of strong economic growth and the highest levels of employment since German reunification.
The US Debt Crisis: A Cautionary Tale
Meanwhile, the United States faces a ballooning debt crisis, with public debt just shy of 100 percent of GDP at $28 trillion ($35 trillion if you add in debts owed primarily to Medicare and Social Security) and projected to rise sharply in the decades ahead. Despite this brewing fiscal crisis, US policymakers consistently fail to address the structural drivers of debt, rising health care spending and old-age benefits like Social Security, as temporary funding battles over annual defense and nondefense appropriations distract legislators from bigger challenges. This lack of fiscal restraint has left the economy vulnerable to higher interest rates, with interest costs now the biggest driver of growth in the budget deficit. The results are reduced investment and slower economic growth, as government deficit spending crowds out private initiatives.
Read more here.
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