Frank Schäffler // 11 December 2024

While the debt brake is a hot topic in Germany, there seems to be little concern about national debt levels elsewhere. Last month, the International Monetary Fund (IMF) reported that global national debt has reached a record $100 trillion, equating to 94% of global economic output. Before the coronavirus pandemic in 2019, debt stood at 73%, and a decade ago, it was 62%. The IMF expects this to exceed the 100% mark in the coming years.

The rise in debt is also linked to increasing interest rates. Since the end of the US Federal Reserve’s near-zero interest rate policy in 2020, rates have steadily risen from 0.25% to 5%. This has significantly impacted loan financing worldwide. Up until 2020, borrowing was cheap; now, debt servicing is expensive. High debt levels are particularly destabilising for emerging economies, as they are often indebted in dollars and must allocate an ever-larger share of their national budgets to service this debt. Even countries indebted in their own currency face challenges. In Japan, where citizens primarily hold government bonds, this has led to decades of sluggish growth. Rather than being invested in productive resources, capital is diverted to fund the state’s growing consumption. This phenomenon can also be seen in Europe, where the Eurozone debt ratio is currently 89%, with Spain at 109%, France at 111%, and Italy at 138%. Germany’s debt stands at 64% - lower but still above the Maastricht criterion of 60%.

If Germany were to abandon its debt brake and increase borrowing, it would likely have a substantial impact on other Eurozone countries. Germany’s credit rating would drop, raising financing costs (currently at €40 billion), particularly for heavily indebted countries. By maintaining its debt brake, Germany helps curb rising interest expenses across the Eurozone. Although EU debt rules contribute to this effect, they have proven largely ineffective.

In a world where credit is easily created, few measures exist to curb debt growth. Constitutional rules, like Germany’s debt brake or those at the European level, only work when there’s a social consensus to uphold them. Otherwise, they’re altered or abandoned. Switzerland has this consensus, so its government debt remains low. Italy lacks such a consensus, and its debt is high. Germany is somewhere between the two, with no strong consensus favouring either model.

Another way to counter rising debt is through state insolvency. This reduces the credit available to nations unable or unwilling to service their debt, leading them to negotiate with creditors in forums like the Paris Club (for state creditors) or the London Club (for private creditors) to secure debt relief. This process is often accompanied by stringent conditions, making it difficult for over-indebted countries to secure new loans, yet it frequently serves as a springboard for necessary reforms. Argentina’s recent president, Javier Milei, provides a radical example of this approach. Without delving into Argentina’s unique situation, it may be time for us, too, to take bold action against the rising debt burden. It would benefit the world immensely.

This blog was originally published by Prometheus in German.