Economist on central banks in corona crisis: “liquidity from nothing”.

How can states financially shoulder the corona crisis? With a new monetary and fiscal policy, says economist Paul Steinhardt.

Stronghold of monetary stability: the ECB in Frankfurt am Main Photo: Boris Roessler/dpa

site: Mr. Steinhardt, in order to mitigate the corona crisis, the federal and state governments are taking on large debts. But because of the debt brake in the Basic Law, these loans must also be repaid in the coming years. What do you think about that?

Paul Steinhardt: If the federal government actually repays its Corona debt from 2023 as planned, that would be problematic. This is because it can only do so while maintaining the debt brake by then cutting spending that is actually necessary. This would reduce demand for goods and services and slow down the economic recovery.

So, because of the repayment, there would be significantly less public funding available in the coming years than in the previous good years?

born in 1958, is editor-in-chief of Macroscopea magazine for alternative economic policy.

That may be one result. The state could cut spending, for example, by reducing social benefits or postponing public investment. Both would be harmful.

You advocate the so-called "modern money theory," according to which there need not be a public money shortage even in times of crisis. Where did you find the cornucopia?

In principle, central banks can supply states with unlimited amounts of money. They create liquidity out of thin air and transfer it to government accounts. Most economists agree that a central bank can do this.

Central banks do that by buying government bonds that governments issue.

Correct. Ultimately, not only in the event of a crisis, but also in normal operations, the central bank must always make its currency available in sufficient quantities for government bonds to be issued. And at present, central banks are buying up some of these securities as part of so-called unconventional monetary policy. But one could also omit the detour – then the central bank would take over the government bonds directly.

Now, the European Central Bank’s primary purpose is not to finance governments, but to issue the currency euro and keep its value stable. When inflation threatens, it raises interest rates, which also makes government debt more expensive. Surely that sets clear limits to this?

The latest tax estimate showed a large budget gap of almost 100 billion euros in tax revenues for this year alone. Because of the Corona crisis, revenues are falling sharply while expenditures are rising substantially. Conventional measures are unlikely to close this gap. Therefore, the government must expect higher debt in the coming years as well. (hko)

This is not a law of nature. It depends on the institutional design of the relationship between the central bank and the government. As long as capital market participants can assume that the central bank will ensure that the government does not become insolvent, the government will have no problem financing itself on the capital market even if interest rates rise.

But then inflation would be driven, and the central bank would miss its most important goal, monetary stability.

Not necessarily. After all, where does inflation come from? One reason could be excessively rising costs, especially wages. Another reason could be effective demand that exceeds the production capacities of an economy. Government spending can undoubtedly contribute to this. But this means that a clever fiscal policy can prevent an economy from operating below and above its productive capacities. Fiscal policy must manage demand in such a way that deflation and inflation are avoided.

Why doesn’t the ECB behave as you suggest?

Because it is prohibited from directly financing sovereigns. But it is currently helping fiscal policy by buying government bonds on the financial market.

Do you see any signs that the German government will follow your theory and allow the debt brake to be relaxed in the coming years?

That’s hard to say. But after all, the black zero, the quasi-prohibition of any new borrowing, had already been called into question by many in academia and business. In any case, the pressure to abandon this goal has become much greater with the Corona crisis.