The German 'debt brake': A shining example for European fiscal policy?
AbstractMany observers consider the German 'debt brake' beyond criticism. In the current crisis, many European countries have difficulties refinancing their budgets, while the German treasury's funding conditions are most favourable. The 'fiscal compact's' call for the introduction of German-style 'debt brakes' in the constitutions of other countries in order to rebuild their credibility on financial markets therefore might seem reasonable. However, there are several reasons to doubt the underlying (macro-) economic reasoning. Two specific problems of the German debt brake are analysed in greater detail: Firstly, the German rule is neither simple nor transparent. The calculation of structural deficits is a complex matter highly sensitive to specification and therefore open to political manipulation. Secondly, the debt brake will ultimately have a pro-cyclical effect because of the way the commonly used cyclical adjustment method works. This will, as a result, destabilise the economy. The German debt brake can therefore hardly serve as a good example for other countries. --
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Bibliographic InfoPaper provided by Berlin School of Economics and Law, Institute for International Political Economy (IPE) in its series IPE Working Papers with number 15/2012.
Date of creation: 2012
Date of revision:
Germany; debt brake; Euro zone; Euro crisis; sovereign debt;
Find related papers by JEL classification:
- H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
- H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- H6 - Public Economics - - National Budget, Deficit, and Debt
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