Austerity and Corona: Who pays for the crisis?
By Moritz Warnke
[This article published in July 2020 is translated from the German on the Internet, Austerität und Corona: Wer zahlt für die Krise? « Zeitschrift LuXemburg (zeitschrift-luxemburg.de).]
In view of the financial requirements outlined above, it can be assumed that a fifth phase is now being added as part of the Corona crisis. But this time the coordinates are different, because for the first time the loans are taken out under conditions of the debt brake.
CORONA CRISIS AS A COVER FOR PRE-EXISTING CRISES: WILL THE AUSTERITY REGIME OF THE DEBT BRAKE BE SANITIZED?
The Corona crisis is currently overshadowing three crises that are also currently being - covertly - negotiated: First, an economic crisis that has been beginning anyway since the fall of 2019, in which the ECB has hardly any more options to stimulate the economy via interest rate cuts. As a result, the ECB had already ramped up its bond program again in fall 2019. Second, the crisis in municipal finances (keyword: bankrupt municipalities and old municipal debts). Third, an investment crisis, better known as an investment backlog. This crisis led to the debt brake itself being called into question by the capital side in 2019 on the grounds that it was endangering the location because, contrary to what had been hoped, savings were being made on investments instead of social spending. Pressure is now being "let out" on this front. As a result, the debt brake is likely to sit a little more firmly in the saddle again with regard to political operations. Investments have now been made, at least in part, and the legally required repayment schedules will put corresponding pressure on social spending and public services. Things could look different in the "everyday minds" of many people. For here, the main thing that is likely to stick is that the state can very well go into debt in order to finance "really important things" even when revenues are lacking.
Whether and how the crisis in municipal finances and the old debt issue will be solved is currently an open question. Partial concessions were made in the economic stimulus package, but a systematic solution is still being blocked by the CDU/CSU. Perhaps the SPD finance minister will succeed in pushing through a settlement for the old debts now that the grand coalition is just "throwing billions around". Paradoxically, the Corona crisis would then initially have the opposite effect for some municipalities: they would initially be freed from the austerity trap and once again be able to act. The durability of this state of affairs also depends on whether this is linked to fundamental changes in the federal structure of state finances.
The structural economic crisis that had already set in before Corona makes it questionable to what extent the economic recovery will go beyond a "rebound effect" in the coming year. If the Corona stimulus measures do indeed lead to a new phase of economic growth, "Corona" would have led to a state-interventionist capacity to act in a way that could hardly have been expected otherwise, thus resolving the depression of fall 2019.
DO THE DEBTS HAVE TO BE PAID?
A look at the handling of previous crises shows that taking on debt for some degree of state interventionism does not necessarily have to combine with the question of who pays for the repayment of the government debt taken on. In previous crises, the question of "who is going to pay for it" could largely be sidestepped because, while the debt was essentially barely repaid, economic growth increased and the debt burden was thus reduced relative to economic output (debt-to-GDP ratio). The 2009 financial crisis, for example, increased the debt-to-GDP ratio to 81% in 2010, and while only a small portion of the debt incurred was repaid in subsequent years, the debt-to-GDP ratio nevertheless declined to 63% in 2019, largely due to strong economic growth.
According to the spirit of the debt brake, things are to be different this time. This is because, contrary to what many assume, the debt brake has not been "suspended", but instead recourse is being made to the exceptional rule laid down in it that new borrowing is permitted in "exceptional emergency situations beyond the control of the state" (GG, Art. 109) - although the law requires that, unlike in the past, a repayment plan must be submitted for this purpose. According to the declared intention of the Federal Minister of Finance, the Corona debt is actually to be repaid within the next 20 years. This time horizon is not legally specified, but can be derived from the European Fiscal Treaty (1/20 rule). In contrast, widely recognized economists such as Jens Südekum argue that debts should be "outgrown" as in past crises and continuously passed on instead of being repaid. The financial investor George Soros has brought into play so-called "perpetual bonds" for Europe, in which the EU would borrow money that it would never have to pay back, but would have to pay a certain annual interest rate forever. Under the Corona crisis, Austria borrows as a 100-year bond - at an annual interest rate of just 0.85 percent. The state of North Rhine-Westphalia also issued a 100-year bond with a volume of €2 billion in January 2020, for which the state pays a fixed interest rate of 1.375% annually. Real interest rates are therefore currently negative even for very long loan terms (assuming the ECB's political inflation target of just under 2% is enforced). In a pragmatic approach, it is therefore worth at least trying to stretch repayment schedules to the longest possible period everywhere. Ultimately, courts would then probably have to clarify what is an "appropriate" period for debt repayment. But 50-70 years as a time period could be in and would be economically justifiable given interest rates.
LEFT ANSWERS TO THE QUESTION OF WHO SHOULD PAY FOR THE CRISIS
If the costs of the crisis are not to be passed on to the general population via cuts in services of general interest, there are basically three options. First: Payment is postponed far into the future over a very long duration of the loans. Second: The debt is "cancelled." This may sound a bit crazy at first and is hardly politically feasible at present, but on closer examination it is not as absurd as it sounds. To do this, you have to understand how the national debt of many European countries has worked since the euro crisis. Currently, most countries borrow money on the capital market by issuing government bonds. These bonds are bought by banks and often sold on to the ECB as part of its bond-buying program. The money that the ECB needs for this purpose can be "printed" by the ECB itself as a central bank or, nowadays, "created" by means of digital entries in the relevant databases. As a result of this process, the ECB is now one of the most important creditors vis-à-vis many European states - and the question rightly arises as to what would now cause more problems: (further) cuts in public service systems to repay the debt, or simply deleting the debt from the ECB's database.
The third option, not to finance the crisis costs through cuts in services of general interest, should sound more familiar again to many ears: The state must increase its revenues - and it must do so by taking the money from the rich, not by reaching into the small pockets again via VAT increases after all. To this end, for example, historical instruments could be revived. After World War II, for example, there was a one-time tax on assets to finance the reconstruction of the country. Based on this, a corona wealth tax could now be levied on very high assets and the collection could be spread over several years. A corona wealth levy has been mooted by economist Rudolf Hickel, for example, and also by the chairwoman of the LEFT party, Katja Kipping. In view of the enormous need for state financing, the solidarity surcharge could also be retained or reintroduced as a corona soli. In addition to a one-time wealth tax, a permanently levied wealth tax ("millionaire tax") could also be imposed on large fortunes, as well as a luxury tax (e.g. as an increased VAT rate on yachts, Porsches, Rolex watches and similar luxury goods). The state's fight against tax dodging by large corporations, such as numerous DAX-listed companies, through profit-shifting stations in tax havens could be systematically intensified. A ban on tax dodging could, like social-ecological criteria, be a condition when the state grants loans to companies.
The advantage of increasing the state's revenues is obvious. After all, in Keynesian economic theory, taking out loans is linked to the goal of generating new economic growth through them (which then makes it possible to service or pass on the loans). There is a catch, however. Under certain circumstances, we may want and need to invest in areas of society that will not necessarily contribute to new economic growth at all - for example, if systematic investments are made in reproductive activities in the health sector or in a reduction in the use of nature not only, but also in the context of climate change. Here, borrowing may, in some circumstances, create a trade-off that needs to be weighed. In view of the upcoming distribution struggles and the attacks of capital on public services of general interest, all three proposed solutions should be examined pragmatically. As long as the balance of power is so unfavorable, the most "realistic" left option might be to postpone the answer to the question of who pays for the crisis far into the future via long-term loans. But the situation can also change quickly. And anyway, it's probably never wrong to seek out talk shows, family birthday parties and one's own neighborhood to talk about cancelling debts, taxing large fortunes and, if necessary, socializing large companies.