Germany's forbearance reaching its endpoints
In a recent development, a commission has been established to propose reforms for the debt brake mechanism in Germany, as calls for change have grown louder. The debt brake, a fiscal rule that limits the government's borrowing capacity, has been a success in maintaining Germany's top creditworthiness, but critics argue that it has come at a high cost through years of investment restraint.
Volker Wieland, a member of the commission, advocates for stronger fiscal discipline. He argues that prolonged delay in consolidation makes deficit reduction more difficult and that investments should be focused on productive, growth-promoting ventures. Weak growth could make investors in German government bonds nervous, as it undermines financial sustainability.
Jens Weidmann, a prominent figure, only considers the investment offensive to be justified if the funds are invested in such growth-promoting investments. He has expressed concerns about the federal government's investment offensive via a special fund and the exceptions for defense spending, deeming them too extensive.
Infrastructure in Germany has deteriorated, and the investment backlog is enormous. The German government aims to address this issue by modernizing infrastructure and reforming the regulatory structure. However, Hessian Finance Minister Alexander Lorz has raised doubts about the political implementation, questioning whether the federal government has recognized the gravity of the situation. He expresses self-criticism, asking whether they have the power to push through de-bureaucratization and restrict consumptive expenditures in favor of investments.
Defense obligations are a permanent commitment, and earlier, with defense spending being much higher, they were also accommodated. Yet, it is already difficult to quickly spend the usual investment funds in the core budget. If this opportunity is missed, a dangerous development could occur, according to Wieland.
Investors are closely watching whether investments have growth effects. Buyers of German government bonds are now waiting for the "autumn of reforms" and are considering alternatives. In the worst-case scenario, they might hold back on buying government bonds, finding collateral bonds like covered bonds more interesting, and corporate bonds with top ratings as an alternative to government bonds in the home country of that company.
Wieland refers to certain investments as not the best use of funds, citing the example of airports in Frankfurt, Kassel, and Paderborn. The demand for German bonds is very high, but there is already a certain concern among investors because the economy is not producing growth. Over the long term, this "could become a problem".
As the commission presents its proposals for the realignment of the debt brake mechanism, the debate over Germany's investment strategy and fiscal discipline continues to gain momentum. The outcome of these discussions could shape the country's economic future and the confidence of investors in German government bonds.
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