Volume 70, Issue 1

Since the financial crisis of 2008 and intensified during the corona crisis, the interdependence between the stability of the financial systems and the prevailing degree of competition (DC) has been the subject of scientific and economic policy discourse on fragmented markets and „too-big-to-fail“ banks. In theory and empiricism, two fundamentally contrary causal concepts are opposed, the elementary basis of which is the precise measurement of the DC: Competition-stability- versus Fragility-Hypothesis. Based on the recent state of research, it can be shown that alternative DC-Measurements consistently show significantly different competitive conditions and in consequence the evidence for or against a stability-enhancing competitive effect seems to be predetermined by the chosen DC-Measurement.

The Corona crisis marks a significant turning point in the Federal Republic’s national budget. All levels of the overall budget are deep in the red: federal, state, local and social security. This stress on public budgets and social security systems will not suddenly disappear after the pandemic – rather, policy makers face long-term challenges. Public finances must be consolidated! Five theses outline the issue – before, during and after the Corona crisis: The federal budget was structurally out of order even before the Corona crisis. The Corona crisis is only a magnifying glass for budget policy problems. The debt brake is indispensable, both when the economy is strong and weak. We need a mix of tax limits, austerity policies and investments. Tax increases and more bureaucracy are hampering economic growth!

Public debt has increased significantly in the wake of the Corona crisis. In order to remain able to act, public budgets must be consolidated in the coming years. However, no special measures are necessary for this, especially no new taxes. Due to the consolidation of the past years, the debt-to-GDP ratio will probably not exceed the level it reached during the financial crisis. Current policy impulses have been set on the expenditure side. Correspondingly, consolidation should emphasize the reduction of expenditures. An increase of revenues should only be considered, if the measures initially taken prove insufficient.

Germany and other European countries have piled up considerable public debt in response to the Corona crisis. But owing to the ultra-low interest rates, which are likely to remain for the foreseeable future, there are no concerns regarding debt sustainability. Quickly paying down this debt by imposing austerity would be the wrong strategy from an economic point of view, but it could nevertheless imposed by existing fiscal rules. Those rules should be reformed quickly. The right way to handle the Corona debts is to engage in debt rollover, that is, to essentially inflate them away in times of negative real interest rates.

We discuss the risks of high public debt in the aftermath of the Covid-induced economic downturn. Historically low interest rates can tempt governments to expand public debt to excessive levels, since the immediate budgetary consequences are small. But once interest rates rise again, governments may be forced to either conduct painful debt consolidation, default on at least part of their debt, or allow high inflation, at the potential cost of hyperinflation. Because financial market participants may doubt policy makers‘ commitment to servicing the public debt, a high level of debt carries the risk of self-fulfilling debt crises. We stress that new debt should always be associated with growth-enhancing policies that expand the government’s resources, thus reducing the need for painful consolidation and distributional conflict later on.

The German constitutional fiscal rule (the „debt brake“) is increasingly subject to a reform debate that has intensified with the fiscal fallout from the Covid-19 pandemic. This article presents survey evidence from the German state parliaments on views and preferences for the future of Germany’s fiscal rule. The survey among all 16 state parliaments was conducted between May and July 2020 with a participation of almost 30 per cent of all state parliamentarians. The results indicate that the debt brake still enjoys a large general support from more than two thirds of the parliamentarians. However, a reform in the direction of an investment clause is increasingly popular, much more than a clause that would support debt-financed climate policy measures.