The Implementation of the Maastricht Government Debt Criteria in Germany's Federal System

Government debt was an issue intensively debated with the introduction of the European Economic and Monetary Union. Healthy state financing is considered an important prerequisite for the stability of the single currency. In this article, Prof. Fritz Söllner, who teaches public finance at the Technische Universität Ilmenau, discusses various ways of coming to terms with the limits of government dept that stem from the Maastricht Treaty and the Stability and Growth Pact in the German federal system. The government must make sure that it constantly adheres to the debt-to-GDP ratio limit of 60% and also that it create debt leeway for cyclical downturns. As a result, net government borrowing in normal phases of the business cycle should not be more than 1% of GDP and clearly below the 3% mark; borrowing above the 1% mark (and up to 3%) should only be allowed to finance cyclically induced lower revenues and higher spending. Söllner proposes dividing the resulting total debt framework between the federal government (including social insurance) and the Länder (including municipalities) in a fixed proportion (50%:50%) and the Länder share according to the population size. This proposal, in the author's opinion, is backed both by practical and incentive reasons. The disadvantage of lacking flexibility could be compensated by introducing debt certificates to offset the extremes. Söllner argues that the current favourable debt situation should be used to reach agreement on a "regime that would serve the common good".