Germany might be able to handle the current Eurozone bailout, but it’s longer-term problem is how to prevent recurrences.
That’s why Germany’s finance ministry is reportedly preparing new potential rules for the Eurozone, whereby nations would be requires to pass ‘debt brake’ laws similar to what Germany already has.
A debt brake is simply a law that caps a country’s budget deficit to a certain percentage of GDP. For Germany, a debt brake was enacted during the financial crisis whereby the nation is limited to budget deficits of no more than 0.35% by 2016.
The hope is that debt breaks could replace the timid budget restrictions existing currently under the Eurozone’s ‘Stability and Growth Pact’, which has of course proven completely ineffectual.
“Behind this is our belief that we cannot have a repeat of the Greece crisis. We think the Stability and Growth Pact (on fiscal standards) has been insufficient,” spokesman Michael Offer told a regular news conference.
“Firstly, we want to prevent budget crises, we want better supervision of economic policy and thirdly the introduction of a group to fight euro zone crises,” said Offer, declining to give details on individual proposals.
Chancellor Angela Merkel sang the praises of Germany’s debt rules in a speech on Sunday but stopped short of proposing that the euro zone should adopt a similar model.
“I believe that a brake on debt is the right thing,” Merkel said, adding Europe’s high debts were an “alarm signal.”
Obviously the hard part is getting other nations to enact debt brakes, and then follow them.
Thus perhaps Germany could use debt brakes as a stipulation for the financial support it provides. In a sense, it could its bailout money to strengthen the Eurozone not just through raw financial support, but through tough regulatory reform at the same time. Kind of like a mini IMF within Europe, providing money, but with austerity strings attached. It’s a long shot, but perhaps there’s a way Germany can enforce austerity measures within other countries whose governments are too weak to do so. Even if they’re half successful, ie. only half of Eurozone countries accept German-style restrictions, it could be a major improvement from the current situation.