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The German 'debt brake': A shining example for European fiscal policy?

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  • Truger, Achim
  • Will, Henner

Abstract

Many 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.

Suggested Citation

  • Truger, Achim & Will, Henner, 2012. "The German 'debt brake': A shining example for European fiscal policy?," IPE Working Papers 15/2012, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  • Handle: RePEc:zbw:ipewps:152012
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    References listed on IDEAS

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    6. Eckhard Hein & Achim Truger, 2006. "Germany's post-2000 stagnation in the European context - a lesson in macroeconomic mismanagement," IMK Working Paper 03-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Truger, Achim & Jacoby, Wade, 2002. "Tax Reforms and "Modell Deutschland": Lessons from Four Years of Red-Green Tax-Policy," Institute of European Studies, Working Paper Series qt31866224, Institute of European Studies, UC Berkeley.
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    10. Gustav A. Horn & Torsten Niechoj & Christian R. Proaño & Achim Truger & Dieter Vesper & Rudolf Zwiener, 2008. "Die Schuldenbremse - eine Wachstumsbremse?," IMK Report 29-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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    Cited by:

    1. Eckhard Hein & Achim Truger, 2014. "Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 21-38, Februar.
    2. Achim Truger, 2015. "Implementing the golden rule for public investment in Europe," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 138, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.
    3. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal Consolidation, Public Debt and Output Dynamics in the Euro Area: lessons from a simple model with time-varying fiscal multipliers," Revue d'économie politique, Dalloz, vol. 124(6), pages 953-989.
    4. Achim Truger, 2013. "Austerity in the euro area: the sad state of economic policy in Germany and the EU," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(2), pages 158-174.
    5. Jorg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," Economics Working Paper Archive wp_780, Levy Economics Institute.
    6. Hein, Eckhard & Truger, Achim, 2013. "Future fiscal and debt policies: Germany in the Context of the European Monetary Union," IPE Working Papers 24/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    7. Achim Truger, 2015. "The Fiscal Compact, Cyclical Adjustment and the Remaining Leeway for Expansionary Fiscal Policies in the Euro Area," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 157-175, June.
    8. Jörg Bibow, 2013. "Lost at Sea:The Euro Needs a Euro Treasury," FMG Special Papers sp227, Financial Markets Group.
    9. Jörg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," IMK Studies 35-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Katja Rietzler & Dieter Teichmann & Achim Truger, 2013. "IMK Steuerschätzung 2013-2017," IMK Report 81-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item

    Keywords

    Germany; debt brake; Euro zone; Euro crisis; sovereign debt;

    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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