The result is a bias towards the debt overhang

Our German neighbours have recently introduced a fundamental change in their arsenal of macroeconomic policy. From 2016, the Federal Government will not have a deficit greater than 0.35 of potential GDP except in exceptional cases. From 2020, the German Länder will no longer issue debt.

Remember the roles of fiscal policy. Have public deficits and debt is not necessarily a bad thing as long as the dynamics of the debt is under control. In times of recession, revenue decrease, increase in social spending and deficits are contributing to the stabilization of the economy. In times of war, going into debt to avoid that the generation which already suffers fighting also bear the financial consequences of the destruction.

More positively, going into debt to invest in infrastructure that will allow greater growth in the future is generally a good thing. The problem is that our men and women politicians are remarkably easy to make promises resulting in increased spending public and remarkably difficult to raise taxes or reduce costs. The result is a bias towards the debt overhang. With high structural deficits, countries such as the France or Great Britain are found in alarming situations when crisis strikes. The French debt will reach 83 of GDP in 2010, the British debt 90. These deficits are necessary.

In times of crisis such as we are, an exceptional increase in public spending to prevent a total collapse of the economy and a rising unemployment even more catastrophic. But at the time even when we legitimately increase our debt, it also absolutely put in place an effective strategy to reduce in the medium term. Because a too heavy debt as a percentage of GDP increases the risk of default and inflation and the likelihood of financial crisis. It minimizes the margins of tax policy in the future because most of the revenues must be used to repay the debt. A too heavy debt is also a symptom of the irresponsibility of the present generations towards future generations.

The Germans therefore have reason to worry now about the sustainability of their debt. And the France fishing greatly by his inaction in this area. But the Germans chose unilaterally a drastic tax rule which will lead to the disappearance of their debt. This reflects the cultural and moral aversion German debt but limit the ability of the Government to stabilize the economy. With monetary policy conducted throughout the euro area and not specially adjusted to the Germany and fiscal policy under stress, the German economy may well Miss stabilizers tools. In doing so, and given its weight in the euro area, it amplifies the problem of economic cycles for all neighbouring economies. Serious recession, it is also clear that the Germany will not significantly participate in a collective effort of recovery depends efficiency, in an economic zone as Europe, however strongly the number of participating countries.

The endangered medium term of the German debt also raises interesting questions for institutional investors Germanic. Will what assets substitute for the debt in their portfolios If the exchange rate risk is an important dimension, they are primarily referred to the French debt which is the most liquid market and contribute to the financing of French deficits. But the risks of divergence of stock of debts between countries of the euro are dangerous in the long term for the cohesion of the area. The new German tax rule therefore has profound effects on the euro area. However, as far as we know, it was not discussed at the European level. This shows the total (and depressing) lack any coordinating macroeconomic between the France and the Germany and Europe more generally. Our men and women politicians regularly singing the virtues of concerted European action but have systematically recourse to beggar in practice.