The Tempora Mutantur principle is now also affecting public finances

display

Tempora mutantur, nos et mutamur in illis - Times change, and we change in them: The saying from the 16th century fits in perfectly with our times, and especially with the role of the state in economy and society.

Although the state is currently showing how little it can do - from building an airport to vaccinating against Covid-19 - it should rebuild the economy after the pandemic following an ecological master plan.

According to their electoral program, the Greens, who are on the rise in the polls, want to use "the radical changes brought about by the corona pandemic ... in order to make our society fundamentally fairer".

For this purpose, fossil energy yields such as gas, oil and coal are to be exchanged “100 percent” for renewable energies, conventional agriculture is to be “ecological”, the (in future only emission-free) cars in cities and villages are to be replaced by bicycles and e-bikes, the building stock Heating is CO2-neutral and building land consumption is reduced to "net zero".

Since all of this costs money, on the one hand the loan financing of public expenditure is to be expanded and, on the other hand, the state is to be provided with more income through higher taxes on capital income, assets, inheritance and a stronger progression of income tax.

The message is clear: the state is climbing the bridge over the economy and society again.

display

“Tempora mutantur” also applies to the financing of the state, and not only for us.

In the past, the “Washington consensus” of limiting public budget deficits and debts - which Angela Merkel once introduced to Germans as the “principle of the Swabian housewife” - is now the state of yesterday that doesn't understand its financial circumstances to live.

As a result, national debt will rise to heights previously unknown in peacetime, according to forecasts by the Organization for Economic Cooperation and Development (OECD) to 136 percent of gross domestic product in the US, 123 percent in the euro zone and 244 percent in Japan by next year.

National debts of this amount can no longer be financed solely from existing money savings.

As a result, the central banks are in demand.

It used to be their job to provide stable money, today it is more important to provide the states with money - "tempora mutantur" here too.

My colleague Pablo Duarte once calculated to what extent the major central banks bought up the bonds issued by their countries to finance the national budget deficits last year.

display

With a rate of around 96 percent, the European Central Bank clearly leads the league of public financiers.

The ECB's contribution to financing new borrowing differs in the countries of the euro zone.

Italy was at the top with 117 percent.

In other words, the ECB bought 17 percent more Italian government bonds than the Italian state issued in 2020.

To this extent, old debts financed on the market were transferred to monetary financing by the ECB.

In second place is Spain with 113 percent, where the ECB bought 13 percent more bonds than would have been necessary to finance the new borrowing.

On the other hand, at 83 percent and 66 percent in Germany and France, a smaller part of the new debt was financed by the ECB.

display

The reason for the different financing ratios was probably the need for ECB purchases to reduce the interest rate differentials compared to German government bonds.

The yield on French government bonds with a ten-year maturity rose only slightly last March to 0.7 percentage points and then fell again to around 0.3 percentage points.

In contrast, the yield difference for Italian bonds shot up to 2.8 percentage points and could only be reduced to around one percentage point at the turn of the year with massive purchases.

The situation was similar in Spain, where the yield differential reached 1.6 percentage points in April and is now fluctuating around 0.7 percentage points.

The share of the US Federal Reserve (with 55 percent) and the Bank of Japan (with 53 percent) in the financing of the new indebtedness of their states was significantly lower.

In Japan, the fact that the banks increased their purchases of government bonds may have played a role, while in the USA foreign buyers traditionally absorb a considerable part of the new issues.

The USA continues to benefit from the “exorbitant privilege” of the position of the US dollar as the most important global reserve currency and can therefore borrow cheaply abroad.

The USA also offers the second-highest interest rates on more solid government bonds after China and is attractive for many investors from the euro area.

The outflow of capital increases the bond yields of the euro countries, which the ECB then counters with increased purchases.

The consequence of this is that the American state can finance a larger part of its new debt on the market and the weak euro countries are dependent on more central bank financing.

At the moment there is (once again) a lawsuit in the German constitutional court because of the violation of the ban on state financing against the ECB.

It will be exciting to watch how the court pulls itself out of the loop this time without giving the impression that (in a modification of a sentence from dark times) "what is good for the state is what is right".

Thomas Mayer is founding director of the Flossbach von Storch Research Institute and professor at the University of Witten / Herdecke