Moritz Schularik is Professor of Macroeconomics at the University of Bonn and Research Professor at New York University. He is director of the MacroFinance Lab and a full member of the Berlin-Brandenburg Academy of Sciences. He conducts research on financial markets, the causes of financial crises and economic history and advises, among other things, central banks and international organizations.
The federal government is planning a debt of almost 180 billion euros in its budget for 2021. Many are now asking: Can we even afford that? They say: yes we can. Why?
We currently have a situation on the financial markets that allows us to take on this debt on very favorable terms – and that over many years, so that the debt that we have to pay off at some point is increasingly reduced through growth and inflation. In this crisis situation, government debt even makes sense because it enables us to prevent the economy from collapsing even more and therefore the debt ratio to rise even more relative to economic output.
What consequences will the corona recession have for national debt in the short term?
We are in the absurd situation that we are currently making money by going into debt – around two billion euros this year. The financial market is ready to give the German finance minister money and also to pay him for it. This is basically an invitation to make money. In the short term, there is no question that what the German Ministry of Finance has implemented was economically correct and sensible. Germany rightly receives praise and recognition for its macroeconomic stabilization policy. Without these government support measures, the economy would collapse much more severely. There would be much greater structural damage as companies go bankrupt and workers lose their jobs.
So was there no alternative to the sharp rise in national debt?
At the macro level, we have two stabilization tools that we can use: monetary policy and fiscal policy. Interest rates are zero, monetary policy has done what it can do. After the financial crisis, we learned that when monetary policy is at its maximum, fiscal policy plays a key stabilizing role. In Europe in particular, the fact that we have been rather cautious has contributed to the weaker growth trend in recent years. For macroeconomic reasons, it was not ideal that budgets were cut too quickly in Europe after the financial crisis without the private sector being so healthy again that it could have stepped into the breach.
What are the long-term consequences of the national debt?
I assume that the economy will grow again next year. It is not yet clear whether we will get back to where we were before the crisis next year, but I would be rather optimistic. It is now like a one-off shock and we make up for it by going into debt to ourselves.
The euro crisis followed the Lehman crisis with a time lag. Are we threatened by a global debt crisis in two or three years?
You have to differentiate. I think the answer is very clear for Germany and also for other industrial nations: no. With the current level of interest rates, debt sustainability is not a problem at all in the long term. This whole discussion about repayment and tax increases is completely unnecessary. Under very conservative assumptions regarding the growth rate for Germany after Corona, the debt ratio will decrease again on its own. An alarmist discussion is underway that lacks economic foundations. Germany’s debt sustainability is out of the question and Corona does not change that.
That means that you would agree with Olaf Scholz if he said: “We will grow out of the crisis”?
Yes, one hundred percent. We are lucky in misfortune: The crisis came at a time when the international financial markets were very hungry for German government bonds, so that we can sell them with zero or negative interest rates and finance ourselves as dirt cheap. Because interest rates are so low, our debt service burdens are also low, and that makes it very easy to get out of debt.
If industrialized nations are less threatened by a debt crisis, what about emerging and developing countries?
There are a number of countries in the global south – Argentina and Lebanon are perhaps the most prominent examples – that have debt servicing problems right now. But once the public creditors’ standstill agreement expires, other developing and emerging countries will get into trouble. In the emerging countries, however, a lot has happened in the last decade because they can and have done borrowing in their own currency, so that they are no longer quite as dependent on financing conditions and interest rates on the financial markets. Basically, the same applies here: Interest rates are historically so low that the situation for debtors is better relative to previous crises.
What role will monetary policy play in the coming years? Have we long since entered a new era in which national debt is borne by central banks?
We are in a situation where the demand for safe investment opportunities is very high. In economics, we haven’t fully understood why that is, but it’s clear that this is an international phenomenon that has nothing to do with the ECB. This has structural causes and is not controlled by monetary policy. Central banks can influence interest rates in the short term, but not ten, twenty or thirty years into the future. But interest rates are also low on these terms. That makes debt sustainability easy. If we have zero interest rates, we can, in principle, afford more government debt. One has to be careful and should allow some leeway for future crises. But there is no sensible reason to rush to apply the brakes now, because one would have to worry about the sustainability of the national debt.
What danger do you see there?
The greatest risk now is to apply the brakes too early and, under certain circumstances, exacerbate the problems in the corporate sector by reducing this expansionary fiscal policy excessively quickly. If we let the aid run out too quickly, there is a risk that the economy in the rest of Europe will not be stable enough and that we will slide back into a minor recession or experience a very sluggish recovery. We would repeat the mistakes we made after the euro crisis, which we now understand was the wrong policy. That cost us a decade of growth in Europe.
The lavish government aid not only increases the national debt, but also the debt of companies that take out emergency loans. Now there are already warnings of a zombie economy. Is that a realistic risk?
The risk that many zombie companies will emerge at the macroeconomic level is rather low. We have a functioning legal system that results in bankrupt companies being wound up, and we have mechanisms by which we can restructure corporate debt. The problem after 2008 was that the debt was with the households. Restructuring the debts of millions of households is almost impossible. So then millions started saving at the same time and that is economic poison. Now it is not households but companies that are in debt. These debts can be restructured. If a company is over-indebted and is being restructured, from an economic point of view only claims from equity and debt capital holders are exchanged. This is possible without pain.
If you put the corona crisis in historical perspective – how should it be classified in relation to its economic consequences?
We are still in the middle of the crisis. I think it’s a special crisis. It hit the economy from the outside and nobody can be blamed for the crisis. In retrospect, I think it will stand out to what extent it was possible to stabilize the economy through fiscal policy – that is, new borrowing and deficits. We have noticed how powerful and important state fiscal policy can be as a stabilization mechanism. That was something we didn’t fully understand after the last crisis. We have learned that we must and can be courageous in such crises. I think the corona pandemic will be in the history books and textbooks than the renaissance of active, state fiscal policy.