Virtual keynote speech on the occasion of the 70th anniversary of the Institute of the German Economy

Weidmann: Debt brake is not an impediment to forward-looking investment

Bundesbank President Jens Weidmann has refuted the harsh criticism directed at the debt brake by some. In a speech delivered in honour of the 70th anniversary of the German Economic Institute, he said that it was “not an impediment to forward-looking investment and a modern state”.

Mr Weidmann remarked that given the low level of interest rates and the foreseeable need for high investments, some economists have called for greater scope for borrowing. “When it comes to structural government expenditure, which corresponds to roughly half of economic output and which reaches record levels in the budget plans calculated excluding interest expenditure, this appears, to me, to be rather a question of setting priorities,” he said. “This does not mean that any adjustment to the fiscal rules should be rejected fundamentally. Yet measures should remain in place to reliably guard against high levels of government debt.” He also advised against “either relying on interest rates remaining low indefinitely or overestimating the growth effects of government actions”.

Mr Weidmann stressed his belief in the importance of sharing burdens fairly between the generations, noting that the younger generation in particular could be put at a long-term disadvantage as a result of the coronavirus pandemic, as many children and young people’s education has suffered. “Generational fairness also means not leaving our children mountains of government debt. That alone makes effective fiscal rules important,” he stated. In Germany, the debt brake helped to place public finances on a sound footing while times were good, he continued, and is also currently proving that “it can be a flexible tool during crises, providing sufficient fiscal leeway”.

Monetary policy should not be put into the service of fiscal policy

“Of course, it is important not to scale back government support measures too quickly now,” the Bundesbank President cautioned. “In view of the persistent uncertainty regarding the evolution of the pandemic and its economic impact, it is appropriate to take a cautious approach.” He also stressed that the coronavirus crisis should not serve as a pretext to jettison, once and for all, fiscal rules that some dislike. “Matters would become particularly critical if the foreseeable demographic burdens on public finances conflicted with rising interest rates in cases of high debt ratios in future.” After the pandemic, it will therefore be a case of returning public finances to a sound footing. This is also important from a monetary policy perspective, Mr Weidmann remarked, going on to say that monetary and fiscal policy are currently working in concert. However, tensions are likely to resurface when the pandemic-driven crisis has been overcome. Monetary policy is committed to the objective of price stability in the euro area and its reins will have to be tightened again if required by the inflation outlook. “It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Government should roll back its influence over the economy

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal. For instance, the government has been bridging the revenue losses of businesses during the pandemic, making transfers, deferring taxes, guaranteeing loans or even investing in firms. It is thanks to these interventions that the economic slump last spring has not triggered any severe consequences or indeed a downward spiral thus far, he said. However, the measures could hinder necessary structural change, he continued, explaining that “when enterprises with outdated business models remain on the market, they tie up production factors that could be deployed more productively elsewhere”.

At the same time, he noted that the crisis has shown how powerful market-driven solutions are, citing as an example how quickly enterprises switched over to the mass production of masks. After the pandemic, it will be vital for government to roll back its influence over the economy. “The state should not be allowed to redefine its role through the back door, as this would serve to weaken rather than strengthen the entrepreneurial, innovative forces in our market economy.” Going forward, he said, innovative power will be particularly crucial in order to overcome the major challenges our economy and society faces.

Among the challenges Mr Weidmann cited were the transition to a climate-neutral economy, demographic change and digitalisation with all the opportunities and risks it entails. “Many issues are about striking the right balance – for instance, when it comes to the intergenerational burden-sharing, the role of the state in the economy and the tie between economic freedom and social balance. Our economic system is the ideal platform for this. Connecting and balancing forces are embedded in the social market economy,” the Bundesbank President concluded.