My IMK colleagues Christoph Paetz, Katja Rietzler and Achim Truger have just issued an important analysis of experience with the German Schuldenbremse (debt brake) since 2011. If you read German I heartily recommend you to consult it. We will prepare an English translation, but given the importance of the debt brake for the fiscal policy discussion in Europe (and the fact that quality technical translations take time) let me summarise the main points of interest for European readers here.

The first key mesage is that the apparent successes of the debt brake – the over-fulfilment of fiscal targets, rapid consolidation and emulation by other EU governments under the fiscal compact – are in fact a mirage. The consolidation outcomes, in particular the fact that Germany has posted fiscal surpluses for the past two years, result from the favourable economic and labour market development in Germany, especially the unexpectedly rapid bounce-back from the Great Recession. On top of this came substantial savings in interest payments due to the fall in interest rates, as much of the remaining euro area was mired in recession and the ECB pulled out the monetary stops.

The second, more fundamental point is that the favourable business cycle since the introduction of the debt brake has so far concealed its most insidious danger. [Read more…]