[online article on Business Day homepage]
As Europe's economy remains on the brink, the idea of a "debt brake" is one of the most important tools to get fiscal policy under control.
This debate is not just important for Europe, the US and Japan, but also for the health of emerging markets.
That is why it is critical that the Group of 20, at its meeting in Cannes ending today, issues a declaration to establish debt brakes in national constitutions.
To be sure, an immediate imposition of the debt brake would be neither wise nor desirable, given current conditions.
But the time is certainly right for agreeing on the launch of the mechanism at a fixed date in the not-too-distant future. In Germany, for example, the debt brake, approved by parliament last year, will take effect in 2016.
The recent European Union summit prescribed further obligations in this direction for the euro-zone members.
However, mere declarations of intent no longer suffice.
The bet that politicians and citizens made with each other — that they would be rational enough to reduce their debt over time, even in the absence of any firm rules — has failed.
That is why we now need to implement a reliable self-disciplining mechanism.
To be effective, such a debt brake mechanism must meet three tests.
First, it must be anchored in countries’ constitutions, underscoring the hard-to- revoke character of the commitment.
Second, countries must undertake commitments mutually, as is now the case in countries in the euro zone, from Spain and Portugal to Italy.
And third, in light of the past failure of effective monitoring and enforcement, there must be independent watchdog agencies, equipped with penalis ing powers in case of non performance.
But it is not just past practice that makes us in the West accountable for our past actions in running up debt. Our future-oriented self-interest dictates no less. Perhaps the most important number ever generated by the International Monetary Fund, an institution that is in the business of producing millions of numbers, is this: 441%.
That is the expected debt-to-gross domestic product ratio that the Group of Seven (G-7) countries will arrive at on average by 2050 under present policies, if we continue business as usual. Concerned as we rightly are about debt levels approaching 100% for major G-7 nations, some policy makers and policy analysts are still inclined just to wish that number away, believing in a magic healing function of the economy.
However, on the road to 441%, not even the most fantastical economic and political minds can really be prepared to go on with business as usual. The debt brake is a very useful instrument to achieve the turnaround.
The emerging market countries and their vast populations feel with good reason that this is their time, and that a shadow that lay over them for centuries has been lifted at last.
In most of these nations’ minds, the past is closely associated with colonialism. If the former colonial powers — read today’s G-7 nations — now don’t get their fiscal acts together, there is a real danger of a new form of colonialism.
That new "colonialism" would manifest itself in the serious growth tax that would be imposed on the developing nations. That "tax" would take the form of a global economic collapse and a decline in development aid related to an unresolved western debt overhang that may very soon prove to be unsustainable.
Or it may take the form of high inflation, which would have the same effect on emerging market countries, which depend on macroeconomic stability in order to execute their plan to move out from under the shackles of centuries-long underdevelopment.
All a debt brake says is this: first, we need to live within our means. And second, we need to understand that the pre- crisis spending levels were the maximum level of public spending and that any future needs or desires can be financed only by cutting other, already funded, activities, by an identical amount.
Over the past several decades, it was usually emerging market countries that, in various waves of debt crises, were forced to learn to live within their means, often at the behest of their western creditors. Now that situation has reversed itself. This time, it is the West that has to take the tough medicine.
Zimmermann is director of the Institute for the Study of Labour in Bonn, Germany.