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German economists urge government to ditch debt pledge, boost investment

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German economists urge government to ditch debt pledge, boost investment
FILE PHOTO: The skyline with its financial district is photographed early evening in Frankfurt, Germany, October 8, 2018. REUTERS/Kai Pfaffenbach/File Photo   -   Copyright  Kai Pfaffenbach(Reuters)
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BERLIN (Reuters) – Germany’s fiscal rules to limit public debt are absurd and hurt national interests in light of record-low borrowing costs and a slowing economy, two of its leading economists said on Monday.

The remarks to Reuters by Marcel Fratzscher, head of the left-leaning DIW economic institute, and Michael Huether, director of the employer-friendly IW economic institute, increase pressure on Chancellor Angela Merkel’s coalition government to rethink its pledge to refrain from new debt.

“The debt brake is absurd and is harming Germany,” Fratzscher said. “It requires the federal government to continue making surpluses in what are now economically difficult times and it prevents it from making any further investments to stabilise the economy and safeguard jobs.”

The German economy, Europe’s largest, is widely expected to have at best stagnated in the second quarter, and sentiment indicators suggest it could shrink in the third quarter.

Fratzscher pointed out that Germany had immense, pent-up investment needs in infrastructure, education and innovation, adding that it would not be wise to stick to the no-new-debt pledge after yields turned negative even for 30-year bonds.

This means that investors actually pay the German state a premium to lend it money over a long period.

“The current policy comes at the expense of future generations as the German state is living on its reserves and it’s damaging the country as a business location,” Fratzscher said.

IW director Huether called on Berlin to take on new debt and create a public investment fund worth more than 100 billion euros ($112 billion) for the next decade.

“The debt brake is no longer effective because the circumstances have changed,” Huether said.

“The state now even earns money when it’s taking on new debt. So if Berlin is not doing this now to finance more public investments, it’s simply losing out.”

Huether also argued that Berlin’s argument that the next generation should not be burdened with more new debt had become invalid in light of the changed financing environment.

“If we do not invest now, we will not only burden the present generation, but also leave even higher investment needs for the future generations,” Huether said.

The money in the proposed investment fund should be used for building and repairing streets and bridges, improving the public railway system and for the nationwide expansion of fifth-generation mobile services (5G).

“This ensures planning security for businesses and entrains second-round investment by the private sector,” Huether said.

(Reporting by Andreas Rinke and Rene Wagner; Writing by Michael Nienaber; Editing by Andrew Cawthorne)

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