Where there’s a will, there are funds

Maurice Höfgen

The mantra of the balanced budget dominated German fiscal policy for years. In this view, the state was never supposed to spend more than it collected in taxes. Wolfgang Schäuble, during his time as finance minister some years ago, made it his hallmark. A hallmark of solid fiscal policy. It was sold especially as a way to achieve intergenerational fairness. For a private household, thrift and freedom from debt are virtues, and the idea was for the state to embrace those same values. Olaf Scholz, Schäuble’s successor, carried on with the same narrative.

And then the coronavirus struck. Scholz and the fiscal policy he had inherited – a fixation on balanced budgets – faced a sudden challenge. After all, the pandemic pulled the plug on the business sector. In a situation like this, a state has to ramp up spending even as tax income plunges. Higher expenditures mean things like coronavirus loans and grants to businesses that have closed and unemployment benefits for people who are out of a job. If the state had not supported the business sector with this kind of additional funding amid the crisis, a lot of companies would have gone bankrupt, with many more jobs lost.

The crisis forced Scholz to take a pragmatic view of fiscal policy. The same is true of Ursula von der Leyen in her role as President of the European Commission and Christine Lagarde, President of the European Central Bank. All of them responded to the crisis in unusual ways. The European fiscal rules, the Fiscal Compact, the debt brake, balanced budgets – all of these rules that otherwise limit governments in what they can do financially, were suspended without ceremony due to the pandemic. This gave the green light for states to access the European Central Bank’s supply of funds.

Now the big question is: Would this work with the climate crisis, too? Yes. We can afford anything that is feasible in technical terms, if only there is the political will to do it. After all, the European Central Bank is the creator of the euro. It will never run out of money.

This important real-world experience gleaned from the coronavirus crisis also aligns with the theory taught by a new school of economic thought: Modern Monetary Theory.