How Transparent Is Europe’s Public Debt?
WorkshopZEW Workshop on the Future of the German Debt Brake
The European Union and its Member States have created debt-funded financial instruments as a reaction meant to overcome crises and long-term challenges. NextGenerationEU and the Climate and Transformation Fund are prime examples. This begs the following questions, not least due to the Federal Constitutional Court’s verdict on the 2021 supplementary budget: Is budget window dressing being used to circumvent debt rules? And how can fiscal transparency be improved?
With the support of the Strube Stiftung, ZEW Mannheim organised a full-day workshop on 30 November 2023 to discuss these issues. To begin the event, Dr. Jürgen Strube, executive director of the Strube Stiftung, explained: “If we want to maintain economic and political stability in Europe, fiscal transparency and sustainable public finance are indispensable.”
Is public finance still transparent?
In the first panel, Karsten Wendorff, head of Public Finance Department at the Deutsche Bundesbank, addressed the question of whether or not German public finance is transparent enough. In his opinion, there are, among other things, insufficient insights regarding the state of federal finances. Ahmed Demir from the Federal Court of Auditors gave a short presentation demonstrating how NextGenerationEU restricts transparency surrounding the European debt burden. ZEW Research Unit Head Friedrich Heinemann also criticised NextGenerationEU for obscuring the actual magnitude of European public debt. Journalist Silke Wettach from the German newspaper ‘Wirtschaftswoche’ came at the issue from a different perspective by shedding light on the European Commission’s interest in European debt instruments.
Is the debt brake still practical?
The second panel began with Hanno Kube, head of the Institute for Public Finance and Tax Law at Heidelberg University, who concentrated on the exploitation of escape clauses regarding the debt brake during the COVID-19 pandemic and the energy crisis. He exposed how flexibly the debt brake is constructed. In addition to special assets, however, there are further risks of public companies circumventing the debt brake. Désirée Christofzik, Chair of Public Economics at the German University of Administrative Sciences Speyer, addressed the need to improve the debt rules for local authorities. She questioned whether the regulations currently in place for financing municipal endeavours are sufficient. Martin Mosler from the Institute for Swiss Economic Policy at the University of Lucerne outlined Switzerland’s experiences with the debt brake. He emphasised that the regulation is widely supported in Switzerland and how this acceptance contributes to its effectiveness. Journalist Barbara Klauß from the Heidelberg newspaper ‘Rhein-Neckar-Zeitung’ conveyed the media’s perspective on this issue, namely to what extent the general public is concerned with the debt brake. She underlined the importance of making complex economic concepts comprehensible for the public.
More debt for the sake of future endeavours?
In the third panel, FAZ journalist Tobias Piller considered the question of whether NextGenerationEU could boost modernisation in Italy. Arash Molavi Vasséi from the German Federal Ministry of Finance offered the ministry’s perspective on public debt concerns. Considering matters of economic growth, he drew attention to how severely Germany is currently confronted with plummeting growth potential and as a result would also have less leeway regarding public debt. ZEW economist Albrecht Bohne introduced the ‘future quota’ as a possible new indicator for the federal budget. This quota would serve as a guiding principle for aligning public spending with long-term future endeavours, thereby promoting the budget’s sustainability. Silke Übelmesser from the University of Jena and member of the Stability Council Advisory Board provided insights into the advantages and disadvantages of public debt for future investments on both the national and European levels.
Why does the state so willingly take on debt?
The fourth and final panel was opened by former judge of the Federal Constitutional Court Paul Kirchhof, who considered the threat that public debt may pose for democracy. In his view, excessive public debt poses major risks and ultimately also impairs the rule of law and the fundamental intergenerational contract. Chief economist of German newspaper ‘Die Welt’, Dorothea Siems, outlined how the perception of public debt in the media and the general public has changed over the decades. Finally, Niklas Potrafke, director of the ifo Center for Public Finance and Political Economy, explored the political economy of public debt. He analysed the economic and political incentives behind public debt and revealed why governments have particularly strong motives to incur debt.
To end the workshop, participants jointly took stock of the issue at hand. The discussions of the day demonstrated that fiscal transparency is by and large capable of further improvement and should be promoted. Even if reforming the debt brake may indeed be the logical path forward, this fiscal regulation remains an important instrument that contributes to strengthening the future orientation of German fiscal policy.
