Unhappy New Year: How Austerity is Making a Comeback in Berlin and Brussels

Yves here. This is a detailed, yet still very readable, discussion of EU budget rules and the current politics, where they are running up against critical spending needs, particularly for climate change programs and social spending. But it seems that in the EU, austerity always prevails.

By ​Orsola Costantini, Economic Affairs Officer​, UNCTAD and Servaas Storm, Senior Lecturer of Economics, Delft University of Technology. Originally published at the Institute for New Economic Thinking website

Germany’s debt brake and EU fiscal rules will make it well neigh impossible for EU countries to fund the investments needed to decarbonize their economies.

Two separate events in the final weeks of 2023 have reignited the bitter debate over European fiscal rules. The first was the decision, in November, by the German Constitutional Court to deny the constitutional legality of the substantial off-budget spending by the ruling German government. The second event happened in December in Brussels, where the European Union (EU) finance ministers, on December 8, initially failed to reach an agreement on new fiscal rules, set to replace the older rules of the Stability and Growth Pact (SGP) and the EU Fiscal Compact—but then, on December 20, bowed to German pressure for tough debt-reduction rules and clinched a deal. Both events suddenly breathed new life into older arguments over debt brakes and fiscal consolidation that had looked rather dead-in-the-water in recent years. Why so close to Christmas did the ghost of Ebenezer Scrooge decide to reappear in Europe?

The Unexpected revival of Germany’s Debt Brake

On November 15, a bombshell ruling by the German Constitutional Court triggered a month-long political crisis in Berlin that threatened to throw Germany’s ruling coalition government, led by SPD-Bundeskanzler Olaf Scholz, off the rails. According to the German Constitutional Court, the €60 billion extra-budgetary spending earmarked for a climate fund by the Scholz government is illegal—because it violates the so-called Schuldenbremse, i.e., the brake on new government debt that was enshrined in the German constitution in 2009. According to this Constitutional article, Germany’s structural fiscal deficit must be limited to only 0.35% of GDP, thereby capping the debt that either the federal government or the Bundesländer (federal states) can issue in any given year.

Germany’s debt brake had been officially and effectively put on hold in 2020, in response to the national emergency triggered by the COVID-19 crisis, by Mr. Scholz himself, who at that time was Germany’s finance minister in a Merkel-led coalition government, and who invoked the emergency exception clause that allows for a larger deficit. To mitigate the effects of COVID-19 lockdowns, a large stimulus bill was passed in 2020 and a large shadow (“off-budget”) fund was set up for spending on pandemic relief that would not count against the debt limit. In 2021, following the Zeitenwende speech by (now) Prime Minister Scholz, the ruling coalition government authorized an additional shadow budget for military spending (worth €100 billion) and repurposed €60 billion of unspent money from the pandemic emergency support facility to establish a new Climate and Transformation Fund (CTF).

Throwing fiscal caution to the wind and deliberately working around the fiscal straightjacket imposed by the Constitution, the ruling German government proceeded to enlarge the space for fiscal policy by creating a total of 29 off-budget financing vehicles—all supposedly permitted under the constitutional emergency exception clause. The biggest and most important one is the already-mentioned climate fund CTF, because this fund is fundamental to both the 2021 agreement underpinning the coalition politics of the three-party “traffic-light” coalition government and the financing of Germany’s ambitious climate and energy transition during the coming decade.

In short, the German government has been bypassing its debt brake and quite likely also the SGP. To a non-German observer, the duplicity is plain: while the current German government has no qualms about running large unchecked (off-budget) deficits outside its regular budget, it has continued to insist that other countries in the European Union follow the fiscal rules of the SGP to the letter.

This hypocrisy has now been exposed by the opposition party CDU, which, seizing the political opportunity, challenged the constitutional legality of rechanneling emergency funds originally intended for COVID for use against climate change. Reminding everyone of Wolfgang Schäuble’s reputation as the Swabian guardian angel of fiscal responsibility, the CDU argued that the emergency exception clause (which made the suspension of the debt brake possible in the first place) no longer applied and, hence, Germany’s fiscal policy stance should return to the constitutionally prescribed ‘black zero’.

Germany’s Constitutional Court agreed with this argument—and thus blew a big hole in Germany’s public finances. For the 2024 budget, the Scholtz-led government has had to find an additional €17 billion to fill the hole, and drastic spending cuts, including on social policies, have become unavoidable. This is no accident: it is precisely what a Constitutional debt brake is designed to do: prevent fiscal deficits from swelling for contingent political reasons and instead forcing them to shrink. In attempting to shield public finances from political influences, this mechanism denies the inherently political character of any fiscal policy and depicts austerity as a neutral, good bookkeeping practice. Unable or unwilling to modify the rule, the German government is left with no other choice than to implement a completely unnecessary round of fiscal austerity in an already stagnating German economy.

The court ruling exposed deep rifts between the three coalition parties: the social-democratic SPD, the fiscally very conservative liberal FDP, and the Green Party. The government was forced to adopt an emergency budget for 2023 and struggled to reach a deal concerning the fiscal budget in 2024. Finally, on December 13, the governing coalition parties agreed to stick to the debt brake and cut the federal budget deficit by slashing expenditures by €17 billion in 2024. (The FDP resisted proposals to hike taxes to fill the spending gap, but minor taxation measures made it into the deal.)

The strategically important Climate and Transformation Fund will be cut by €45 billion between 2024 and 2027. Billions of euros in state subsidies agreed with US chipmaker Intel for planned semiconductor production plants in Magdeburg in the state of Saxony-Anhalt—which are considered critical to the transition of Germany’s car manufacturers to electric vehicles—are now up in the air. Likewise, Infineon is building a €5 billion plant in Dresden, Bosch is investing €250 million to expand its Dresden cleanroom and US chipmaker GlobalFoundries is in the fourth year of an expansion of its wafer manufacturing capacity in the same city. All three are banking on generous state support and now fear their promised subsidies are at risk. In addition, financial incentives to buy electric cars will be ended sooner than originally planned; subsidies for the expansion of solar power will be cut, while other funding programs, covering everything from energy-efficient homes to the installation of heat pumps and collective citizen energy initiatives for onshore wind are put on hold; while less public money goes to the urgently needed renovation of the country’s crumbling railway network. Taken together, the austerity drive could well jeopardize Germany’s climate and energy transition.

The Scholtz government promised continued support for Ukraine, allocating €8 billion to the war-ravaged country in 2024. Germany’s bigger problem is that it has committed to structurally ramping up its annual military spending to the NATO guideline of 2% of its GDP—some €80 billion per year. As it turns out, the expenditure on war and armaments will not be affected by the budget cuts. The compromise government budget for 2024 includes the highest military spending in the history of the Federal Republic of Germany: €85.5 billion, which is 26 percent more than in 2023. As Scholz said in his government statement, the military spending serves German great power interests. The costs of Germany’s military grandeur are shifted to working and middle-class households, as social spending is cut, the removal of subsidies on electricity grid charges will raise electricity prices and the CO2 levy on fossil fuels will be increased. Next year economic growth in Germany is predicted to be lower—and because the chronic underinvestment in public infrastructure, education, and the green transition continues, Germany’s longer-term growth prospects are also in doubt.

The revival of the debt brake has reignited the political and economic debate in Germany, and abroad, on the usefulness of fiscal rules. While some conservative political leaders in Germany have now openly expressed support for an intelligent reform of the constitutional debt brake, majority opinion in Germany still continues to consider any such reform politically taboo. The result is a paradox: precisely at the moment when more public funding is needed for strategically addressing pressing collective challenges (including adapting to the consequences of global warming, catching up with the global digital economy, and solving a public housing crisis), Germany’s policy-makers are swept up in a renewed frenzy for belt-tightening austerity.

Unfortunately, the key message of the austerity myth—that what is economically rational for an individual household will also be rational for an entire country and for its government—is plain wrong, macroeconomically and also for the climate, as the United Nations economic analysis repeatedly suggested. As argued by Peter Böfinger (2023), the only effective remedy against Germany’s economic disease is that “public debt [is] deployed as an engine of growth—not by reducing taxes and accompanying transfers but by increasing public investment to stimulate domestic demand and the emergence and deployment of new technologies.” To make this possible, the Germans have to get rid of their debt brake fetish.

Reforming the Fiscal Rules of the Eurozone

The second recent event that rekindled the debate on fiscal rules was the summit of European Union finance ministers on December 7-8, 2023, on new fiscal rules, set to replace the older rules of the SGP—which include a maximum budget deficit of 3 percent and a maximum ratio of public debt to GDP of 60 percent. In 2020, the European Union suspended its fiscal rules to accommodate the sharply increased public expenditure occasioned by the COVID-19 pandemic – the same moment when Germany suspended its constitutional debt brake.

There is agreement that a return to an unchanged SGP is undesirable because it would be economically painful for the large number of member states that currently breach the existing fiscal rules. Specifically, average government debt in the Euro Area was 91% at the end of 2023Q2 and six member states (Belgium, France, Greece, Italy, Portugal, and Spain) carry public debt above 100% of their GDP. At the same time, in 2022, the average government deficit was 3.6% for the Eurozone countries, and eight member states (including France, Italy, and Spain) have fiscal deficits well above 3 percent. A return to an unchanged SGP would mean that 14 member states would have to cut spending or raise taxes to the tune of €45 billion in 2024 alone. The outcome can only be higher unemployment, lower wages, and further underfunding of public services. What a gift another—unnecessary—round of austerity would be to the smoke-and-mirrors xenophobic arguments, with the next European elections due in June 2024 (Lynch 2023): When resources appear to be scarce, those arguments suggest they should be reserved for the “deserving” native population (however defined) and taken away from the “undeserving” (the migrants). Far from curbing immigration, the ensuing policies merely intensify the race to the bottom in working conditions, by leaving migrant workers less protected, and further reducing internal demand.

It is said that an intelligent donkey does not trip twice on the same stone—so even the European Commission now recognizes that a return to the unreformed SGP would imply a return to stiff austerity which would risk repeating the traumatic recessionary experiences of the Eurozone crisis (2010-2014). A second reason why a return to the SGP rules is undesirable is that all EU member governments understand that the need for public funding is growing because of the climate, digital, and energy transitions in the next decades.

Accordingly, a number of proposals for reforming the SGP have been put on the table—the European Commission itself proposed tweaking the rules by introducing a four-to-seven-year adjustment period in which countries exceeding the deficit (3% of GDP) or debt (60% of GDP) norms of the SGP would commit to ‘sustainable’ policy reforms meant to force down the deficits and public debts. The Commission’s reform proposals met firm opposition from both the pro-austerity camp led by Germany, the Netherlands, and Austria, and the countries (including France and Italy) arguing for more fiscal clemency. Their disagreements concern the minimum pace of deficit and public debt reductions and the inclusion or exclusion of strategic public expenditures including green and digital investments (Italy) and/or defense-related public spending (France) when calculating an “excessive” fiscal deficit.

On December 20, after marathon negotiations, the 27 EU finance ministers reached an agreement on a reform of fiscal rules that will set out a somewhat laxer pace of debt and deficit reduction than had previously been the case, but—crucially—still within tight spending limits demanded by the pro-austerity camp. Under the agreement, member countries with ‘excess public debts’ will get more time—between 4 and 7 years—than before to put their debts on a declining path and more independence in the design of plans outlining their fiscal targets, while the earlier requirement to cut excess debt by 5 percent per year was ditched.

However, the two key fiscal requirements—a 60 percent debt-to-GDP ratio and a 3 percent annual deficits limit—have remained in place, and, at the behest of the pro-austerity camp, the agreement contains extra safeguards and sanctions to enforce debt reduction. Specifically, to make sure that member states stick to the fiscal rules, the European Commission will draw up national spending plans in which countries with debt ratios above 90 percent of GDP will be required to cut excess debt by one percentage point per year over the duration of their national spending plan. That target is halved for countries with debt ratios above 60 percent but below 90 percent of GDP. Additional budget targets will be placed on countries with deficits above 3 percent and debt-to-GDP ratios above 60 percent. Sanctions are strengthened under the agreement, which stipulates that countries that miss spending plan targets are put into a so-called excessive deficit procedure, which would require them to reduce spending by 0.5 percent of GDP per year. The European Commission is expected to slap eight or nine countries (including France and Italy) with its sanctions mechanism in Spring 2024.

A last-minute concession won by France and Italy ensures that countries subject to such a procedure will be able to discount debt interest costs in the period 2025-2027, effectively reducing the required spending cuts. However, in a key win for Berlin, the recent agreement also requires EU governments to keep their annual (structural) deficits at around 1.5 percent of GDP, arguably to give countries some room to increase spending to cope with an unforeseen crisis without breaching the 3 percent public deficit norm.

It is evident that the reformed SGP does not turn the page on austerity. Rather the opposite is true: the notion of ‘fiscal rules’ has lost none of its appeal to policymakers in Brussels and the new rules have an even stronger austerity bias (as the new rules require member states subject to the debt-reduction procedure to aim to cut their deficits to 1.5% of GDP with annual curbs to spending)—which we think is regrettable.

The “Voodoo Economics” of the Debt Brake and Fiscal Rules

Let us clarify, right away, that from the point of view of economic theory, nothing justifies the sanctimoniousness of Germany’s constitutional debt brake or the EU’s supranational fiscal rules. Already at the onset of the Maastricht Treaty, economists warned against the inclusion and use of budgetary limits, providing an early critique of the fiscal rules of the SGP and their inherent contractionary bias. Based on a crystal-clear analysis, Luigi Pasinetti (1998, p. 112)warned that the SGP “prevents expansionary policies in periods of recession and mass unemployment [….] and […], on top of that, it also imposes heavy fines. I cannot see how all this could be a symbol for anything. It simply sounds foolish.” Similarly clear and critical was Alain Parguez, who already in the 1990s argued that the true purpose of the EU fiscal rules was to tie the hands of national states through the imposed inability to engage in deficit spending, thereby forcing them to implement a quasi-permanent austerity.

Many mainstream economists agreed. Buiter, Corsetti, Roubini, Repullo, and Frankel (1993), for instance, concluded that “the fiscal convergence criteria designed to eliminate or prevent ‘excessive deficits’ are badly motivated, poorly designed and apt to lead to unnecessary hardship if pursued mechanically. The debt criterion especially would cause avoidable pain. There is no case for restricting the debt-GDP ratio to lie below any specific numerical value; and à fortiori no case for an identical limit for [many] heterogeneous countries” (Buiter et al. 1993, p. 87). The economic price of fiscal deflation and permanently reduced fiscal flexibility, which are part and parcel of the SGP and are paid for by EU member states, may well be unbearable—which was also the argument of Joseph Stiglitz (2016).

The idea that the relative size of public debt is somehow related to economic growth has long been discredited (see the useful meta-analysis based on 47 primary studies by Philip Heimberger 2022). It is clear that this point is well understood even by Germany’s macroeconomic policymakers who, after all, have been caught red-handed, attempting to fuel Germany’s growth and (climate and energy supply) resilience through public investment, financed by shadowy off-budget financing vehicles. Of course, the more indebted EU member states find themselves in a similar predicament and feel the same need to step up public spending in areas that are critical to the future development, competitiveness, and resilience of their economies.

Austerity and stiff fiscal rules unnecessarily restrict the fiscal room for maneuver, which the state could use to help the economy respond to the demands of the coming digital and zero-carbon age. It is a public secret that (unwarranted) austerity crippled the Eurozone economy—especially hurting the countries of Southern Europe—as is shown by recent papers published on the INET website: Storm (2019) on Italy; Stirati (2020) on Italy and elsewhere; Girardi, Paternesi Meloni and Stirati (2017); Toporowski (2023) on Poland; and Roncaglia (2023). Crucially, austerity has also crippled the countries in the pro-austerity camp, as has been argued by Storm (2023) for the Netherlands; and by Bofinger (2023) who uncovers Germany’s true economic disease.

An equally large literature has clarified that a fiscal expansion, focused on public investment geared toward green technological innovation and employment creation, including in sectors connected with health care and education, is needed to overcome the stagnation of the European economy (Bloomfield 2022; Archibugi 2023). This literature points to a growing inconsistency in EU policy-making. On the one hand, the EU countries need to be more ambitious and bolder on climate action, the energy transition, and the digital economy, but on the other hand, these same countries have to work within an unworkable fiscal straightjacket that is fundamentally biased in favor of austerity. In this context, it must be noted that the deflationary macro policy stance of the EU (and imposed on its member states) has also allowed a historic rise in profit shares. Unsurprisingly, while several EU institutional sources have lamented a crisis of competitiveness, none has pointed to critical evidence that a more equal income distribution, to be attained through employment creation and cheap public services provision, is an essential component of a stable growth path with productivity growth (Storm 2017; Taylor and Omer 2018; Capaldo and Omer 2021).

All in all, it is clear that the fiscal rules, which lack a convincing economic rationale, play a primarily political role, because these rules are used to throw a cloak of spurious statistical precision over any mix of cross-pressures and interests (Costantini 2017; Costantini 2018). The real problem concerning fiscal policy, thus, is political. The resistance of the German electorate to the idea that they will have to be held financially responsible for some other country’s overspending is proverbial. The concern is understandable since German voters and policymakers have no real political control over the use of resources outside their borders. But what gives them the right to prevent other countries’ spending, especially if there is no economic logic that should support such limitation? As always, the negotiations in the EU stop short of offering a solution to this impasse.

Ultimately, therefore, the real issue here seems to be one of democratic legitimacy and political representation in the EU, the lack of which impedes a discussion over the economic and social goals to be attained collectively. The democratic deficit drives governments and electorates to embrace economically inefficient and politically unviable positions which have, since the Maastricht Treaty, systematically produced slow growth (except for short-lived spurts of export- or credit-led expansion in some areas), rising inequality, and the deterioration of the health of the people and the environment.

The impact of this reduced political space has dominated the political color of governments regardless of their electoral mandate (Costantini 2015; Storm 2023; Toporowski 2023; Lynch 2023). The seemingly technocratic ‘rules’ have helped to depoliticize policy debates on critical and strategic issues—etching the TINA rule into the DNA of all mainstream political parties. The EU fiscal rules have placed important social and economic issues outside of political contestation, negating the fundamental centrality of politics to achieving our collective goals. The implication is that we, as Europeans, have no effective space to discuss and debate the political, social, and environmental priorities that our public budgets should address with all the unlimited power granted by the strength of our economies. After all, the EU is still one of the largest and richest economies in the world. Instead, European politics has been sadly reduced to petty negotiations and recriminations, with no direct political implications, except that of empowering a complacent and incompetent bureaucracy in Brussels.


Esther Lynch (2023), head of the European Trade Union Confederation (ETUC), is right to warn against the severe social and economic consequences of a failure of a progressive reform of the fiscal rules of the SGP and a return to the traumatizing austerity policies of Christmas Past. The situation is dire and not just for Europeans. Let us not forget that the global consequences of the slowdown in the European Union were estimated earlier this year to be at least twice as large as those of the much-discussed economic slowdown in China, and now they are likely to worsen (UNCTAD 2023).

It will not come as a surprise if the entirely unnecessary round of austerity in an already ‘sick’ German economy (Bofinger 2023) reinforces a ‘doom loop’ of economic stagnation, and heightened mistrust in the political system. Likewise, more austerity in France, which would have to raise around €30 billion annually to meet the fiscal targets of the SGP, will raise political polarization even further.

The debt brake and fiscal rules will make it well neigh impossible for EU countries to fund the investments needed to decarbonize their economies and meet their climate commitments under the Paris Agreement. Worse, it will be impossible to do this in a socially acceptable manner—meaning, in ways that the strongest shoulders carry the largest burden of climate and energy transition, while vulnerable groups are protected from the transition costs. The failure to arrive at a fair and acceptable sharing of these burdens will lower popular support for these environmental policies—while reinforcing narratives that global warming is just a hoax, propagated by the elites, meant to suppress the “vox populi” and to impose an “eco-dictatorship”, another flashpoint in current culture wars.

The only way out of this nightmare scenario is to shift the nature of the economic and political discussion and initiate a process leading to a re-politicization and democratization of fiscal policy in the EU in a permanent way. We are not talking here about the opportunity to slightly change otherwise de-politicized technical rules governing fiscal policy that always are subject to closed-door negotiations and interpretations, and then used to safeguard powerful interests (Costantini 2017; Costantini 2018). What we mean is that it is time to ditch the constitutional debt brake and discard the EU fiscal rules—in order to open up space for meaningful political deliberation and discussion on the short-term and long-term challenges facing all citizens (voters) in the EU. Anything that falls short of this must be considered a failure.

Ebenezer Scrooge, the “squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner”, redeems himself from a life of miserly selfishness by repenting of his past actions after being shown scenes of his younger life, his present life, and his future by the three ghosts that visit him on Christmas Eve. As 2023 turns into 2024, the question is whether Europe can free itself from the grave errors in its economic thinking and policy-making and finally bury the misleading and dangerous ideas concerning fiscal policy and debt brakes.

* The opinions expressed in this article are the authors’ own and do not in any way reflect the views of the organizations at which they are employed.

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  1. upstater

    It’s not just European elites pushing austerity… NYT Morning piled on January 2

    Less sustainable

    The federal debt starts the new year at a level that is hard to grasp: $34 trillion. That is 1.2 times the U.S.’s annual economic output. At the end of World War II, the ratio was only about 1.1.

    Both parties have contributed to the situation. Republicans have passed large tax cuts. Democrats have enacted ambitious climate and health care initiatives. Both funneled money to Americans in response to the Covid pandemic.

    For years, many economists believed the country’s debt was not a problem. Interest rates were low, which held down debt payments. Inflation was also low, which suggested the debt wasn’t hampering the economy. If anything, additional government spending helped create jobs when unemployment was elevated for much of the 2010s.

    But times have changed, and federal deficits now look scarier.

    Risk of delay

    Both parties have offered partial solutions to the growing debt. Democrats favor higher taxes on the rich, and Republicans favor cuts to Medicaid and some other federal programs. But each party has mostly blocked the other’s proposals, allowing deficits to add to the debt year after year.

    Even if the preferred policies of each party eventually are enacted, they do not come close to solving the problem. Neither party is willing to cut the biggest government programs: Social Security, Medicare and the military. And both have ruled out tax increases on most households.

    Sounds like time is right for a Grand Bargain. Never time to “end corporate welfare as we know it” or outlaw billionaires through taxation and policy.

  2. Camelotkidd

    “Unfortunately, the key message of the austerity myth—that what is economically rational for an individual household will also be rational for an entire country and for its government—is plain wrong…”
    Someone needs to inform Obama

    1. Altandmain

      Obama’s legacy is ultimately to create the conditions for Donald Trump and more anti-Establishment politicians to start to gain a hold.

      So too has been the legacy of many of the European politicians. If they want someone to blame, they have nobody but themselves to blame for this situation.

      I suspect that this new wave of austerity will have the same political backlash. By destroying people’s standards of living, they are creating the conditions that make anti-Establishment politicians inevitable.

  3. Ludus57

    Anyone outside who is wondering about the current overall state of the UK should look to the idiotic imposition of austerity on the country by the Conservative/LibDem coalition after the 2010 general election.
    I will not waste time going over the consequent history, as the results “can be seen from space” – to quote then chancellor George Osborne, it’s chief implementor.
    Moronic policy from moronic political positions is obvious, but it is alarming to note that a possible future Labour government under Keir Starmer and his chancellor Rachel Reeves currently appears to be offering the same prospect, under the guise of desperately needed change.
    Living in interesting times really is a verifiable curse.

  4. jo6pac

    The only way out of this nightmare scenario

    They could start off by getting out of under Amerika’s thumb and call off of the sanctions on Russia. Then again, I have no idea what I’m talking about.

    1. Paris

      They could, but why would they? For decades they have been paying nicely for the welfare state while the US spends on their defense capabilities. Please lol.

      1. Revenant

        US defence capabilities ARE its welfare state. Have you seen the ineffectiveness of US Wunderwäffen in Ukraine or the conditions of its soldiers or the socialised medicine free at the point of care of the VA? Bismarck would be proud.

  5. djrichard

    If only the EUzone had a Federal Government that could engage in fiscal spending and run up a deficit, like the US and other countries can. Edit: by country, I mean entities that can issue bonds that are the yield of last resort in their native currency. The entities in the EUZone gave up that power when they gave up their currencies for the euro. Though it could be said that Germany serves in that role by being the state that hoovers up the trade surplus from other states in the EU.

    1. Ignacio

      To tell the truth, please, no federal Europe, by no means. The path the EU is taking, the less Europe the better. Imagine a Federal Europe ruled by the deficit verboten core and der kriegshetzer chorus.

      1. Irrational

        I have to agree – and I used to think that the EU (or at least the European Community (-ies) before that) brought us good things, I live the European mobility idea with the languages that go with it.
        However, now it seems war is peace, freedom is slavery and ignorance is strength. And don’t get me started on those European values!
        At the same time, I cannot see anything bad happening Ursula – she will, as you say, fail upwards.
        For there to be meaningful change, the EU probably has to break apart, since the parties that might change the status quo are also anti-EU.

          1. c_heale

            The financial system of the EU was no reason for the UK to leave since it wasn’t in the Euro.

  6. NN Cassandra

    BTW, one underappreciated aspect of this deficit madness is that there are real world examples of countries that were able to run balanced budgets for decades. I’m of course talking about the comunist regimes of Europe. Nothing brings more joy than telling neoliberal hack all what he is attempting to do is write “communist budget” right into constitution while pathetically failing to even have a shot at achieving it, every year plunging into more and more billions of debt. And yet, his communist forefathers were able to run state budget with “black zero” for forty years straight and they started with bombed out country after WW2. They fail where even the communist succeeded. Sad!

    Did the MMT guys talk somewhere about this? I think it neatly demonstrates that what we call budget deficit and state debt is just accounting artefact stemming from the reality of oligarchs and corporations successfully structuring the economy so they are able to claim bigger share of products/services than they can realistically consume, and then needing to somehow recycle all the money back without appearing of giving it away to the proles for free. So debt. But if there are no billionaires and all companies are owned by state, there is no need for such tricks.

    1. djrichard

      Interesting. Any recommended reading on this topic, communist countries running balanced budgets for decades? Thanks!

      1. NN Cassandra

        Strangely, nothing. I’m not aware of any theoretical or popular work on this. And while the deficit hysteria is of course alfa and omega of any public discussion about economy, the question if there is some recent historical example where we can see how running persistent balanced budgets works in practice seems to be completely taboo. Not even the communists can bring themselves up and hammer the point that if anyone wants balanced budgets, he should vote for them since they are the only ones with proven track record of achieving it.

        It has the benefit of being easy to roast poor right wing souls on the internet, because nobody talks about it and there are no ready made talking points and counterarguments. In fact it’s so ingrained in peoples minds that surplus budget = economic nirvana and comunism = economic hell, that they often can not even believe these two things coexisted. Of course you then turn on TV and there is some idiot basically giving Nobel prize acceptance speech for the feet of jacking up taxes, slashing pensions, helth care, education, etc., all this to bring the deficit down form 300 billions to 290, so you wonder on whom the joke is.

        So all I can give you is link to wikipedia about Czechoslovakia budgets. (At the bottom there are several tables due to the fact Czechoslovakia was federation so there were state budgets and federal one, plus there was also the dissolution of Czechoslovakia few years after the revolution, but the basic point, that before 1989 the state was consistently running small surpluses but right as the economy was privatized and transitioned to capitalism things turned into ever rising deficits, is clear.)


    2. Yves Smith Post author

      No, sorry, that case does not work. Get a copy of Jim Rogers’ Investment Biker. The book was published in 1997 and Rogers had spent over a year biking around the world. Bare minimum to get a book to print with normal publishing process is 1 year, so his travels were from 1995 and earlier. He rode across Siberia eastward. Many many many patently non-market, insane prices, a long holdover from the Soviet era. Budgeting is a meaningless exercise if your domestic prices are arbitrary.

      1. NN Cassandra

        I freely admit I know nothing about Siberia in 1995, but I known for a fact that communists in Czechoslovakia were running balanced budgets all the time. They had insane prices too, but that should made things more difficult for them. You set prices of things to basically random numbers, damage economy in the process, and still somehow end up with small budget surplus. Then you introduce market prices, economy gets better, but suddenly you have persistent deficits that even the commited fanatics can’t get rid off. How is that possible?

        1. djrichard

          I could see this from a Levy/Kalecki profit equation perspective. Where does profit come from? Kalecki’s equation shows that it comes from investment. But it also shows that profit comes from government deficits. When the US started outsourcing to China / Mexico etc, the deficit contribution became more prominent to fill the gap due to people having less income. Edit: And if I had to guess, I’d say there was less investment as well once we started outsourcing though that said we’re now such a speculative/bubble based economy an argument could be made that that is a substitue for investment.

          Anyways, if you’re not a profit driven economy, then running deficits becomes less important. And obviously don’t need bubbles either.

          You still might want to run a defict, e.g. as a basis for getting elected by promising lower taxes. But if the retirement and well being of the people is already the responsibility of the government, then is lower taxes really that important?

          It still begs the question though. Presumably the currency in the economy still gets hoovered up by the strong hands. And the only way to recycle that currency back into the economy is to either tax them or to sell them bonds. In a capitalist society, we sell them bonds. I wonder how this works in a commuist society. Do the strong hands simply hoard currency such that it doesn’t get recycled back into the economy? Or are the strong hands taxed at 100% such that they have no hoards? Or is the state ultimately the strong hands anyways, since all businesses (or businesses of any size anyways) including banks are owned by the state? I’m thinking maybe the latter.

          1. NN Cassandra

            Basically the latter. The strong hands derive power and ability to get more things from their positions. So if you are head of some state company, you can’t pay yourself 1000’s multiple of average worker salary, nor you can extract fortune from the company with some private equity magic. But you can tell the people under you to do things for you personally, like work on construction of your house, or get prefered access to whatever your company makes, and also you can trade such favours with others. Which is just plain old stealing, but you can steal only what actually exists and you can get hands on (and not so much as to create suspicion) and only as long as you are in charge. And all this power is informal, so it doesn’t show on government accounting books where you would need to somehow resolve the imbalances.

            1. djrichard

              Makes sense.

              It would be interesting to compare which is less soul destroying.

              E.g. one measure would be management being abusive to their employees. If the “biz” doesn’t need to be profit oriented, that should lead to less abuse. Even more true if the “biz” doesn’t need to react to “creative destruction”, the defining feature of capitalism. That said, still seems like there’s opportunity in a communist system for abuse especially on a more personal basis if governance controls aren’t very good. But if there’s mobility which allows people to flee an abusive management, then that’s less an issue. Mobility would presumably be a lot easier if there’s full employment.

              In the above, I’m assuming labor still doesn’t really own the means of production in a communist system. That management does. But if labor does have a stronger hand, then that should definitely make a difference.

  7. The Rev Kev

    ‘the austerity drive could well jeopardize Germany’s climate and energy transition.’

    The German is already having an energy transition. I was reading this week that pollutants were way down there and the reason is that so many industries have shut down or are preparing to move. So deindustrialization will let Germany meet it’s Green goals so I guess that that is a win. Sorta. At this point it is up for debate who has caused the most industrial destruction of Germany – Scholz & Habeck or the USAAC 8th Air Force of WW2. But to go for austerity? The one thing proven by empirical experience that never works but only serves to cripple your economy? The Germans are going to be in a foul mood when they see their livings standards drop noticeably while money goes out the back door to the black-hole known as the Ukraine or into expensive weapons programs that will not have enough troops to man them. Expect a large wave of educated German immigrants going out of the country in the coming year. It has happened before. Several hundred meters from where I live is a cemetery and most of the graves in the older section are written in German.

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