Oct. 12, 2020, will go down in German financial history. For the first time, new public debt increased at a rate of more than €10,000 ($11,900) per second, faster than during the 2007-09 global financial crisis, when a huge volume of net borrowing was needed. This headlong acceleration of debt, in Germany and in countries around the world, is the price being paid to stave off the economic consequences of COVID-19.
In the German Bundestag, the fiscal consequences of the pandemic have become a central concern, with Germany’s massive €1.3 trillion rescue/stimulus package fueling an already long-standing debate about the country’s debt sustainability. The key question is whether, and for how long, government and society can continue to shoulder the growing burden.
Detailed assessments offer reason to hope that Germany is well prepared. We have followed the path of sustainability, adhering to the rules of the Stability and Growth Pact of the Maastricht Treaty and reducing our debt to less than 60% of GDP before the COVID-19 pandemic hit. These consolidation measures over the past 12 years have given Germany some financial leeway that can now be used in the crisis. The Harvard University economist Kenneth Rogoff, a former chief economist of the International Monetary Fund, has long argued that Germany’s strong balance sheet gives it the capacity to react forcefully in a deep crisis.